Home Equity Loan Online Lenders – Home renovations can be expensive. But the good news is that you don’t have to pay out of your own pocket. A home improvement loan allows you to finance the cost of upgrading and renovating your home.
Specialized rehabilitation loans, such as the FHA 203(k) mortgage, exist specifically to fund home renovation projects. And there are also second mortgages — home equity loans and HELOCs — that can provide money for home renovations or any other purpose.
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So what is the best home improvement loan? It depends on your needs. Here’s what you should know.
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Home Equity Loan (HEL) allows you to take out a home equity loan secured in your home. Your home equity is calculated by assessing the value of your home and subtracting the outstanding balance on your existing mortgage.
Unlike cash refinancing, a home equity loan does not pay off an existing mortgage. If you already have a mortgage, you will continue to make monthly payments as well as pay off the new home loan.
A loan secured by your own home “is distributed as a single payment in advance. It’s like a second mortgage,” says Bruce Eilion, a realtor and real estate lawyer.
With a mortgage, your home is used as collateral. This means that lenders can offer lower rates because the loan is secured by property. The low fixed interest rate makes a home loan a good option if you need to borrow a large amount.
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Remember that you will probably pay closing costs of 2% to 5% of the loan balance for your home equity loan. So make sure the amount you borrow justifies the added value.
As a bonus, “a home equity loan or HELOC may also be tax deductible,” says Doug Leaver of Tropical Financial Credit Union, an FDIC member. “Check with your CPA or tax advisor to be sure.”
The Home Equity Line of Credit (HELOC) is another great way to get a home equity loan without refinancing. HELOC is similar to a home loan, but works more like a credit card. You can borrow from him up to a pre-approved limit, pay him back, and borrow from him again.
Another difference between home equity loans and HELOC is that HELOC interest rates are adjustable; they can rise and fall over the life of the loan. But interest only accrues on your outstanding HEOC balance — the amount you actually borrowed — and not on the entire line of credit.
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You can only borrow a fraction of the maximum loan amount at any time, which means your payments and interest payments will be lower.
HELOC may be a better option than a home loan if you have several less expensive or long-term renovation projects that need to be financed on an ongoing basis.
By the end of the term, the loan must be repaid in full. Or HELOC can be converted into an amortizing loan,” Eilion says. “Note that the lender may be allowed to change terms during the life of the loan. This can reduce the amount you can borrow if, for example, your credit drops.”
However, “HELOC offer flexibility. You don’t need to withdraw money until you need it. And the credit line is available for up to 10 years,” Leaver says.
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Another popular way to get money for a home renovation project is cash refinancing. With this option, you are refinancing a new mortgage with a larger balance than you currently owe. You will then pay off your existing mortgage and keep the remaining money.
The money you receive from cash-in refinancing comes from your own equity. It can be used to fund home improvement projects such as basement remodeling or kitchen renovations. However, there are no rules that determine what the funds should be used for.
Cash refinancing is generally the best home improvement loan when you can lower your mortgage rate and get cash. This only works when the current market rates are lower than your existing rate.
You can also change the length of the term to pay off your home earlier. For example, let’s say you have 20 years left on your 30-year loan. Your cash out refi could be a 15-year loan, which means you’ll have to pay off your house five years early.
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So, how do you know if cash-in refinancing is worth it? Start by comparing costs over the life of the loan, including closing costs. This means comparing the total cost of a new loan with the cost of keeping your current mortgage for its entire life.
Keep in mind that cash-out refinancing has higher closing costs – and they apply to the entire loan amount, not just the cash back. Therefore, you will probably need to find an interest rate that is significantly lower than your current one for this strategy to be worth it.
With the FHA 203(k) program, you don’t have to apply for two separate loans or pay closing costs twice. Instead, you finance the home purchase and the home improvement at the same time when you buy the home.
FHA 203(k) rehab loans are great when you buy a retainer and know you’ll need funding for home improvement projects right away. These loans are government-backed, which means you get special benefits like a low down payment and the ability to apply with a less-than-ideal credit profile.
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On the other hand, this type of loan may take longer to close. “FHA 203(k) loans can be made and are difficult to get approved,” says John Meyer, The Mortgage Reports loan officer and licensed MLO. If you go down this path, it’s important to choose a lender and loan officer who is familiar with the 203(k) process.
If you don’t have enough net worth to take out a loan, a personal loan is another way to finance home renovations.
Because a personal loan is unsecured, you will not use your home as collateral. This means that these loans can be obtained much faster than HELOC or home equity lines of credit. In some cases, you may receive a loan the next business day or even the same day.
Personal loans may have adjustable or fixed rates, but they are generally higher than real estate loans or HELOCs. However, if you have excellent or even just good credit, you can probably get an affordable rate.
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The payback period for a personal loan is less flexible, often between two and five years. And you will probably also pay the closing costs.
These conditions may not seem so favorable. But for some borrowers, personal loans are more affordable than HELOC or real estate loans. If you don’t have enough capital in your home to take out a loan, a personal loan may be an option to pay for home renovations.
These loans also make sense to finance emergency home repairs if your water heater or HVAC system needs to be replaced immediately. However, Meyer warns that personal loans are the “least desirable” option for homeowners.
You can also fund some or all of the renovation costs with plastic. This is the fastest and easiest way to finance a home improvement project. You don’t even need to apply for a loan.
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But because home renovations often cost tens of thousands of dollars, you need to get approved for a higher credit limit. Or you will need to use two or more credit cards. In addition, you are likely to pay higher interest rates than those charged on home renovation loans.
If you need to use a credit card to finance repairs, consider applying for a card with an introductory 0% annual interest rate (APR). Some cards offer up to 18 months to pay off the balance at this initial rate. This approach only makes sense if you can pay off your debt within that repayment period.
Like personal loans, credit cards may be acceptable in an emergency. But do not use them for long-term financing. Even if you have to use credit cards as a temporary solution, you can get a secured loan later to pay off the cards.
The best home improvement loan will suit your specific lifestyle needs and unique situation. So let’s narrow down your options with a few questions.
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If so, you can access the lowest rates by taking out a home equity loan with cash refinancing, a home equity loan, or a home equity line of credit.
If yes, see FHA 203(k). This is the only loan on our list that combines home improvement costs with your home purchase loan. Just review the guidelines with your loan officer to make sure you understand the disbursement rules.
By taking out just one mortgage to cover both needs, you save money on closing and, in the long run, it’s an easier process.
“The only time I recommend the FHA203(k) program is when buying a lock-on top,” Meyer says. “But I would still advise homeowners to explore other loan options as well.”
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If you need urgent home repairs and don’t have time to apply for a loan, you may need to consider a personal loan or even a credit card.
Just remember that these options have significantly higher rates than secured loans. So you want
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