How To Get A Home Improvement Loan Without Equity – Renovating your home can be expensive. But the good news is that you don’t have to pay out of pocket. A home improvement loan allows you to finance the cost of upgrades and repairs to your home.

Specialty rehab loans, such as the FHA 203(k) mortgage, exist specifically to finance home renovation projects. And there are also secondary mortgages — home equity loans and HELOCs — that can provide cash for home renovations or any other purpose.

How To Get A Home Improvement Loan Without Equity

So what is the best home improvement loan? That depends on your needs. Here’s what you should know.

The Best Home Improvement Loans Of 2023

A home equity loan (HEL) allows you to borrow against the equity built up in your home. Your home equity is calculated by valuing your home’s value and subtracting the outstanding balance owed on your existing mortgage loan.

Unlike a cash out refinance, a home equity loan does not pay off your existing mortgage. If you already have a mortgage, you’ll continue to make monthly payments on it while you pay off your new home equity loan.

A home equity loan “is dispersed as a single down payment. It’s similar to a second mortgage,” says Bruce Ailion, real estate agent and attorney.

With a home equity loan, your home is used as collateral. This means that lenders can offer lower rates because the loan is secured against the property. The low, fixed interest rate makes a home equity loan a good option if you need to borrow a large amount.

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Remember that you will likely pay closing costs between 2% and 5% of the loan balance on your home equity loan. Therefore, make sure that the amount you borrow makes the added cost worth it.

As a bonus, “a home equity loan or HELOC can also be tax deductible,” says Doug Leever of FDIC Member Tropical Financial Credit Union. “Check with your CPA or tax advisor to be sure.”

A home equity line of credit (HELOC) is another great way to borrow from home equity without refinancing. A HELOC is similar to a home equity loan, but works more like a credit card. You can borrow from it up to a pre-approved limit, pay it back and borrow again.

Another difference between home equity loans and HELOCs is that HELOC interest rates are adjustable; they can rise and fall over the life of the loan. But interest is due only on the outstanding HELOC balance—the amount you actually borrowed—and not on the entire line of credit.

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Overview Of Heloc Loans

You can only borrow a portion of your maximum loan amount at any one time, which means your payments and interest would be lower.

A HELOC might be a better option than a home equity loan if you have a few less expensive or longer-term remodeling projects to finance on an ongoing basis.

By the end of the term, “the loan must be paid in full. Or the HELOC can convert to an amortizing loan,” says Ailion. “Note that the lender may be allowed to change the terms during the life of the loan. This can reduce the amount you can borrow if, for example, your credit goes down.”

However, “HELOCs offer flexibility. You don’t have to take money out until you need it. And the line of credit is available for up to 10 years,” says Leever.

Home Improvement & Renovation Loans

Another popular way to get money for a home remodeling project is a cash-out refinance. With this option, you refinance to a new mortgage with a higher balance than you currently owe. Then pay off the existing mortgage and keep the remaining cash.

The money you receive from a cash-out refinance comes from your equity. It can be used to finance home improvement projects, such as finishing a basement or remodeling a kitchen. However, no rules specify what the funds must be applied to.

A cash-out refinance is usually the best home improvement loan when you can lower your mortgage rate and get cash out. This only works when current market rates are below the current rate.

You may also be able to adjust the term length to pay off your home sooner. For example, let’s say you have 20 years left on your 30-year loan. Your cash-out could be a 15-year loan, which means you’ll be scheduled to pay off your home five years early.

Home Improvement Loans Written On The Model Of Home Stock Photo

So how do you know if you should use a cash-out refinance? Start by comparing costs over the life of the loan, including closing costs. This means looking at the total cost of the new loan versus the cost of keeping your current mortgage for life.

Keep in mind that cash-out refinances have higher closing costs — and they apply to the entire loan amount, not just the repayment. So you’ll probably need to find an interest rate that’s significantly lower than your current rate for this strategy to be worthwhile.

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With the FHA 203(k) program, you don’t have to apply for two separate loans or pay closing costs twice. Instead, you finance your home purchase and home improvements at the same time when you buy the home.

FHA 203(k) rehab loans are great when you’re purchasing a fixer-upper and know you’ll need financing for home improvement projects right away. These loans are backed by the government, which means you’ll get special benefits — like a small down payment and the ability to apply with less-than-perfect credit.

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On the other hand, this type of loan may take longer to close. “FHA 203(k) loans can be difficult to originate and get approved for,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. If you go this route, it’s important to choose a lender and loan officer familiar with the 203(k) process.

If you don’t have enough equity to borrow from, a personal loan is another way to finance home improvements.

Since a personal loan is unsecured, you won’t be using your home as collateral. This means that these loans can be obtained much faster than HELOCs or home equity lines of credit. In some cases, you may be able to get loan financing the next business day or even same day financing.

Personal loans can have adjustable or fixed rates, but they are usually higher than a home equity loan or HELOC. That said, if you have excellent or even good credit, you can probably get an affordable rate.

Should I Use A Home Loan Or Personal Loan For Home Improvement?

The repayment period for a personal loan is less flexible, often two to five years. And you’ll probably pay closing costs, too.

These terms may not sound so favorable. But personal loans are more affordable than HELOCs or home equity loans for some borrowers. If you don’t have much equity in your home to borrow against, a personal loan can be an option to pay for home renovations.

These loans also make sense for financing emergency home repairs—if your water heater or HVAC system needs to be replaced right away. However, Meyer cautions that personal loans are the “least advisable” option for homeowners.

You can also finance some or all of your remodeling costs with plastic. This is the fastest and easiest financing option for a home improvement project. After all, you won’t even have to fill out a loan application.

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Home Equity Loans Vs Home Improvement Loans

But because home improvements often cost tens of thousands of dollars, you must be approved for a higher credit limit. Or, you will need to use two or more credit cards. Plus, you’ll likely pay higher interest rates than home improvement loans.

If you need to use a credit card to finance your renovations, try applying for a card with a 0% introductory annual percentage rate (APR). Some cards offer up to 18 months to pay off the balance at that introductory rate. This approach is only worthwhile if you can pay off your debt within the repayment period.

Like personal loans, credit cards can be accepted in an emergency. But you shouldn’t 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 fit your specific lifestyle needs and unique situation. So let’s narrow down your options with a few questions.

Mortgage Banking & Home Remodel Loans

If so, you can access the lowest rates by borrowing against the equity in your home through a cash-out refinance, home equity loan, or home equity line of credit.

If so, check out the FHA 203(k) program. This is the only loan on our list that includes home improvement costs with the home purchase loan. Just review the guidelines with your loan officer to make sure you understand the fund disbursement rules.

Taking out a single mortgage to cover both needs will save you money on closing costs and is ultimately a simpler process.

“The only time I would recommend the FHA203(k) program is when I’m buying a fixer-upper,” says Meyer. “But I would still advise homeowners to explore other loan options.”

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When you need an emergency home repair and don’t have time for a loan application, you may need to consider a personal loan or even a credit card.

Remember that these options have significantly higher rates than secured loans. So you will want to

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