Whether a major renovation or a remodel, starting a home project can be a huge undertaking. But finding the right financing option can help make the process run more smoothly and hopefully minimize the financial burden.
Homeowners today have a number of financing options available, but two popular options are home equity loans and home improvement loans. These loan types carry very different terms, requirements, loan amounts and more — details that can help you decide which is best suited for your project. Below, well break down everything to know about each one before you apply.
If you’re a homeowner planning renovations, additions, or repairs to your house, you may be wondering how to finance your next project. Two popular options are home improvement loans and home equity loans. But which one is the better choice? There are some key differences between these loan types that can help guide your decision. In this article, I’ll compare home improvement loans and home equity loans so you can determine which is the better fit for your situation.
What Are Home Improvement Loans?
A home improvement loan is an unsecured personal loan that you can use to finance projects to update remodel or repair your home. These loans are not backed by your home’s equity. Instead, lenders determine your loan amount based on factors like your credit score, income, and current debt obligations.
Some benefits of home improvement loans include
- Available without putting your home up as collateral
- Typically easier to qualify for than home equity loans
- Fast approval process – often in just a few days
- Fixed interest rates, so your monthly payments are predictable
- Loan amounts from $1,000 up to $100,000
Drawbacks of home improvement loans include:
- Higher interest rates than home equity loans
- Shorter repayment terms of 2 to 7 years
- Lower maximum loan amounts
What Are Home Equity Loans?
A home equity loan lets you leverage the equity you’ve built up in your home to access funds. These loans use your home as collateral, meaning the lender can take possession of your house if you default.
Advantages of home equity loans:
- Lower interest rates than other types of loans
- Higher maximum loan amounts based on your home equity
- Long repayment terms up to 30 years
- Potentially tax deductible interest (consult a tax pro)
Downsides of home equity loans:
- Require home appraisal and application process
- Closing costs of 2% to 5% of loan amount
- Risk losing home if you default on the loan
Key Differences Between the Loans
Now that we’ve covered the basics of each loan type, let’s compare them across some key factors:
Collateral: Home equity loans require you put up your house as collateral, while home improvement loans are unsecured.
Interest rates: Home equity loans offer lower rates, often between 4% and 8%. Home improvement loans have higher rates from 8% up to 20% or more.
Loan amount: Home equity loans let you borrow up to 85% of your home equity, so you may qualify for up to hundreds of thousands. Home improvement loans max out around $100,000.
Term length: Home equity loans have longer terms of up to 30 years. Home improvement loans are shorter at 2 to 7 years.
Speed: Home improvement loans can be approved in a few days. Home equity loans require an appraisal and more paperwork, taking at least a few weeks.
Costs: Home equity loans have closing costs of 2% to 5% of the loan amount. Most home improvement loans don’t have closing costs.
Which Loan Is Right for You?
When deciding between a home equity loan and home improvement loan, consider these key factors:
- Project scope – Will a home improvement loan provide enough money, or do you need the higher amount a home equity loan offers?
- Interest rates – The lower rate of a home equity loan can save substantially over time on larger projects.
- Collateral risk – Are you comfortable using your home as collateral for a home equity loan?
- Timeline – Do you need funds quickly for your project? Home improvement loans are faster.
Here’s a quick recap of which loan tends to work better in different situations:
- For small projects under $25,000, a home improvement loan is usually sufficient and easier to obtain.
- For major renovations requiring $50,000+, a home equity loan lets you borrow more at a lower rate.
- If you want to avoid putting your home at risk, choose a home improvement loan.
- If you need fast access to funds, apply for a home improvement loan.
The bottom line? Evaluate your specific needs and finances to decide if a home equity loan or home improvement loan is the right choice for your next home project. With the right loan option, you can move forward with renovations and enhancements while minimizing finance charges.
What is a home improvement loan?
Home improvement loans, unlike home equity loans, are unsecured personal loans. As a result, they can be more expensive — but if you have great credit (and shop around for the best rate) you may be able to find an APR thats comparable to home equity loans.
The amount you are eligible to borrow is also different under a home improvement loan. Instead of the value of your home equity, the lender will consider a number of factors in your application — including your credit history, existing debts and more. Among the home improvement loans we found, many start around $1,000 and go up to around $100,000.
Home improvement loans can make good alternatives if you dont want to use your home as collateral toward a renovation project. But consider how much the interest rate you qualify for could add to your total amount owed over time, and whether you can qualify for as much money as you need for your project before you decide.
What is a home equity loan?
Home equity loans are secured loans that use your home as collateral. These loans carry lower interest rates than other borrowing options, have long repayment periods and even have tax advantages when used for eligible home improvements.
You may also qualify for more money than you would with other loans. The equity youve built in your home is equal to its current market value minus the amount you still owe toward your mortgage. And if youre one of many Americans whose home price has increased in recent years, you may be eligible for more than you think.
Just be careful taking on a larger home equity loan than you can handle. Not only is it a lot to repay, but you could risk losing your house.
“Fluctuating home values will impact the maximum loan amount since loans are based on a maximum percentage of home value,” says Gregory Crofton, CFP, founder of Adap Tax Financial. Though you may be able to qualify for more, Crofton recommends limiting your total home equity indebtedness to 75%. “Too many borrowers overextended themselves in the early to mid-2000 and ended up losing their homes,” he warns.
Start using your home equity today and see top rates you can qualify for here.
HELOC Vs Home Equity Loan: Which is Better?
FAQ
What is the difference between a home improvement loan and a home equity loan?
What is a disadvantage of a home equity loan?
When not to use a home equity loan?
What is the minimum credit score for a home improvement loan?
What is the difference between a home equity loan and home improvement loan?
The main difference between a home equity loan and a home improvement loan is the use of equity, but there are some smaller details worth learning about. These details could influence your decision as you find the best way to fund your home renovation project. In all scenarios, the lender determines the amount you can borrow.
Should you get a home equity loan?
Whether or not you should get a home equity loan depends on your financial situation and goals.If you have a large expense coming up, such as a home renovation or college tuition, and you have enough equity
What is a home improvement loan?
As its name suggests, a home improvement loan is used to cover the costs related to home renovations or repairs. Unlike home equity loans, they are unsecured loans. That means they don’t require your home as collateral. Homeowners typically use these loans for medium-sized or smaller home improvement projects.
Can a home equity loan be used for home improvements?
Home equity loans can be used for a variety of purposes, including home improvements, but only if you have a certain amount of equity in your home. To qualify for a home equity loan, you’ll have to meet certain equity, credit score, and debt-to-income (DTI) ratio requirements.