Personal loans for home renovation

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Americans spend a lot of money each year on improving and repairing their homes – more than $ 400 billion in 2019, according to the Joint Center for Housing Studies at Harvard University.

And while the pandemic recession means people are spending less on home renovations this year, renovating a home is still a great way to increase its value and make it a better place to live.

This is especially relevant now that people are spending a lot more time indoors during the pandemic.

But the costs of these renovations can add up quickly.

If you are wondering how to finance a home improvement project, know that there are several options to choose from. Many home improvement projects are funded by a home equity loan or home equity line of credit (HELOC), but there is a third option: take out a personal home renovation loan.

Unlike a home equity loan or HELOC, a personal home improvement loan does not require you to put your home as collateral. The funds are paid up front in a lump sum. However, it will likely have a much higher interest rate than a home equity loan or HELOC, and usually a much shorter repayment period – anywhere from one to five years.

Personal loans are “always a little riskier,” says Carol Ann Reed, real estate agent at Realty Group in Minnesota. “It’s always better to cover the cost of repairs and renovations with cash instead of borrowing,” says Reed. Sometimes this may not be realistic for expensive home renovations or urgent repairs. Here’s what you need to know about home improvement financing with a personal loan, and some alternatives to consider as well.

Should you get a personal loan for home renovations?

A home equity loan, HELOC, or cash refinance are better options to consider, says Dan Moralez, mortgage manager and regional vice president at Northpointe Bank in Michigan.

“The problem with a personal loan is that you’re usually going to pay a higher interest rate and you’re usually going to have an accelerated repayment term because there is no collateral,” says Moralez. “This is probably the worst way to finance home renovations.

So, if you are considering getting a personal loan for home renovations, consider your priorities and your overall financial situation. Take a look at your home equity, analyze your credit health, think about the interest rates you might be offered given your credit rating and overall financial situation, and compare secured versus unsecured borrowing.

Talk to several potential lenders and keep in mind that a personal loan to finance your home improvement project makes the most sense in the following scenarios:

You don’t have a lot of equity in the house

If you haven’t built up a lot of equity in your home, a personal loan can be a way to finance a small to medium-sized home improvement project, like updating your kitchen appliances or replacing your home. an obsolete HVAC system.

Your creditworthiness is stellar

Your credit history and financial history play an important role in determining whether a personal loan is suitable for your next project. The higher your credit score, the lower your interest rate for a personal loan will be, all other factors being equal. There is also more emphasis on your income and your debt ratio (your overall debt to your income) to qualify.

“A personal loan is a bit riskier for a bank. There are secured and unsecured personal loans, so you can secure it with some sort of collateral like your car, but it’s not as stable as your home, ”Reed explains.

Before applying, get your credit report online and check your credit score with your credit card issuer to see where you fall on the spectrum (both are free and only take a few minutes to complete) . If your credit score is between 600 and 600 or less, it’s worth considering other financing options or saving enough to pay for renovations up front.

“A good credit rating will be more important with a personal loan,” says Reed. “If you have bad credit, wait until your credit is in a better position because you will get lower interest rates and have more options.”

If you are confident in your credit score, start collecting documents to show your income and debt-to-income ratio; the lender will want a ratio below 43%, says Reed. If your overall financial situation is healthy, you are more likely to get approval for the amount you want to borrow.

You are ready to trade less fees for a higher interest rate

A personal home improvement loan tends to have lower fees than a home equity loan or HELOC.

For example, it has no application fees, appraisal fees, annual fees, points, or title search and title insurance fees, as home equity loans and home equity loans typically do. HELOC. When comparing the price of a home equity loan and a personal loan, it is important to consider these additional costs.

The downside to a personal loan is that you will likely have to pay a higher interest rate. Your interest rate and how much the lender allows you to borrow will depend on your credit rating, income, and debt-to-income ratio.

You agree to lose tax benefits

When you use a home equity loan, HELOC, or cash refinance for home improvements, you can usually deduct the interest on the loan from your taxes. This is because you are using the funds to buy, build, or significantly improve your home, and because it is a secured loan.

Pro tip

If you are using an unsecured personal loan to finance your home improvement, you may not be able to deduct the interest you pay. Be sure to speak to an accountant or tax advisor to get more details on your specific situation.

Alternatives to personal loans for home renovation

Tapping into home equity is a popular way to finance a home improvement project, more than taking out a home improvement loan. Here are some options to consider.

Home Equity Line of Credit (HELOC)

A HELOC works much like a secured credit card, with a revolving line of credit. You can withdraw up to 85% of the value of your home and you can withdraw money as needed. You can even borrow more when you pay off your balance, but you have to put your house as collateral.

It can be a flexible and cost effective way to finance an ongoing home improvement project. However, since HELOCs have adjustable rates, which could increase in the future, Moralez says you should only go this route if you are able to pay off the debt quickly.

Home equity loan

A home equity loan is sometimes called a second mortgage. Like a personal loan, the money you borrow is paid up front and you pay it back over time in fixed monthly installments. With this type of loan, your home serves as collateral.

Cash-out refinancing

A refinance with withdrawal resets your mortgage clock and works differently than a home equity loan or HELOC.

In this type of refinancing, you would take out a mortgage that is more than what you owe on your home and use the difference to finance your home improvement project. This is an option only if you have enough equity in your home.

You will have a completely new mortgage and interest rate, so you will have to pay the closing costs of the new mortgage. (These costs can be built into the loan, so you don’t have to shell out the money up front.)

But it’s a great option right now when interest rates are extremely low, says Reed. And that’s what makes cash-out refinancing particularly appealing.


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