How Many Years Are Home Improvement Loans – Home renovations 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 improvements and repairs to your home.
Specialized rehab loans like the FHA 203(k) mortgage exist specifically to finance home renovation projects. And there are also second mortgages (home equity loans and HELOCs) that can provide cash for home remodeling or any other purpose.
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So what is the best home improvement loan? That depends on your needs. Here’s what you need to know.
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A home equity loan (HEL) allows you to borrow against the equity built up in your home. Your equity is calculated by assessing the value of your home and subtracting the outstanding balance 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 would continue to make your monthly payments while repaying your new mortgage loan.
A mortgage loan “is dispersed as a single down payment. It is similar to a second mortgage,” says Bruce Ailion, real estate and real estate attorney.
With a home 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 and 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’ll likely pay 2% to 5% of the loan balance for your home loan in closing costs. So make sure 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 with Tropical Financial Credit Union, member FDIC. “Check with your CPA or tax advisor to be sure.”
A home equity line of credit (HELOC) is another great way to borrow against your 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 go up and down over the term of the loan. But interest is only owed on the outstanding HELOC balance (the amount you actually borrowed), not the entire line of credit.
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You can borrow only a portion of your maximum loan amount at any one time, which means your payments and interest would be lower.
A HELOC may be a better option than a home equity loan if you have some longer-term remodeling projects to finance on an ongoing basis.
At the end of the term, “the loan must be paid in full. Or the HELOC can be converted into an amortizing loan,” says Ailion. “Keep in mind that the lender may be allowed to change the terms over the life of the loan. This can reduce the amount you can borrow if, for example, your credit falls.”
Still, “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.
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Another popular way to get money for a home remodeling project is a cash-out refinance. With this option, you refinance with a new mortgage loan with a larger balance than you currently owe. Then you pay off your existing mortgage and keep the remaining money.
The money you receive from a refinance from the equity of your home. It can be used to finance home improvement projects, such as finishing a basement or a kitchen remodel. However, no regulations specify what the funds should be applied for.
A cash-out refinance is often the best home improvement loan when you can lower your mortgage rate and take cash out. This only works when the current market rates are below your current rate.
You can also adjust the term length to pay off your home sooner. For example, let’s say you had 20 years left on your 30-year loan. Your repayment could be a 15-year loan, which means you would be scheduled to pay off your home five years early.
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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 the rest of your life.
Note that cash-out refinances have higher closing costs and apply to the entire loan amount, not just the cash-out. So you’ll likely need to find an interest rate significantly lower than the current rate to make this strategy worthwhile.
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 home improvements at the same time, when you buy the home.
FHA 203(k) rehab loans are great when you’re buying 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 low down payment and the ability to apply for a less-than-perfect credit profile.
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On the other hand, these types of loans can take longer to close. “FHA 203(k) loans can be pulled and are difficult to get approved,” 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, a personal loan is another way to finance home improvements.
Because 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 the same day.
Personal loans can have adjustable or fixed rates, but they are usually higher than a home loan or HELOC. That said, if you have excellent or even good credit, chances are you’ll get an affordable rate.
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The repayment period for a personal loan is less flexible, often two to five years. And you’ll likely pay closing costs, too.
Those 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 from, a personal loan may be an option to pay for home improvements.
These loans also make sense to finance emergency home repairs, if the water heater or HVAC system needs to be replaced immediately. Still, Meyer warns 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 need to complete a loan application.
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But because home improvements often cost tens of thousands of dollars, you must be approved for a higher credit limit. Or, you’ll need to use two or more credit cards. Plus, you’ll likely pay higher interest rates than home improvement loans.
If you must 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 back the balance at that introductory rate. This approach is only worthwhile if you can pay off your debt within that repayment period.
Like personal loans, credit cards can be acceptable 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 match 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 lower rates by borrowing against your home equity with 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 bundles home improvement costs with your home purchase loan. Just review the guidelines with your loan officer to make sure you understand the fund disbursement rules.
Taking out just one mortgage to cover both needs will save you 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 as well.”
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When you need an emergency home repair 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 will want
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