couple looking at blue print plans for their home renovation

If you’re undertaking home improvements, you’ve probably been thinking about how to pay for the costs associated with your project. Home improvements can help you increase the value of your home, allowing you to get a better return on your investment in the long run. However, the money for the renovations has to come from somewhere.

Lending casts a broad net, and there are several types of personal loans that can be used to finance home improvements and/or renovations. Each of these has its pros and cons, and one may be better than another in your situation.

Here, we’ve laid out five of the most common home improvement loans and a bit about each option to help you with your decision.

1. Cash-Out Refinancing

Cash-out refinancing is one of the key ways to access your home equity to take out relatively low-interest loans. Essentially, cash-out refinancing is the same idea as a regular refinance, but when you get your new mortgage, you take out more money than you owe.

This allows you to access the surplus money, which results from the difference between what you owe and the new mortgage in cash. You can then use that cash to pay for home renovations.

This is a particularly good option if you’re already thinking about refinancing. For example, if interest rates have dropped and you’re eyeing a new mortgage, going with a cash-out refinance can kill two birds with one stone. In addition, the interest on money borrowed in a cash-out refinance is tax-deductible* when it is used for home renovations or major improvements.

Consider that most lenders will want you to maintain at least 20% equity in your home at all times. This might limit the amount of money you can withdraw, depending on how much you still owe on your home.

2. Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a line of credit that is borrowed against the equity in your home. Instead of borrowing a lump sum of money, like in the case of a personal loan, you can access your HELOC in a similar way to a credit card. You can borrow money, pay it back, and continue withdrawing more funds. With a HELOC, you can usually borrow up to 80%-90% of your available equity.

Because the interest on money borrowed via a HELOC is also tax-deductible if used to renovate or improve your home, it has similar perks to a cash-out refinance. However, a HELOC can be a good option for those who do not want to refinance their mortgage.

3. Home Equity Loan

A third option for borrowing money with your equity as collateral is a home equity loan. In contrast to a HELOC, the money is dispersed as a lump sum rather than operating as a revolving line of credit. In contrast to a cash-out refinance, this loan is separate from your mortgage.

Because you are borrowing against your home equity, the interest rates are usually lower than those for a personal loan and credit cards. You may choose a home equity loan if you know how much you want to borrow and want the money as a lump sum, but do not want to refinance your mortgage.

Like a HELOC and a cash-out refinance, the interest is tax-deductible if you use the money to renovate or substantially improve your home. With a home equity loan, you can borrow up to 90% of your equity. Remember that if you take out a home equity loan, you’ll be paying back your mortgage and another loan.

4. Personal Loan

Personal loans can be used to finance home renovations. These have certain perks — they’re traditionally very quickly processed and dispersed. This can make a personal loan a great option if you need to make a rapid, emergency repair on your home. In contrast to credit cards, they have fixed monthly payments, so it’s more straightforward to repay your debt.

Unsecured personal loans require no collateral. This can be a good option in some cases, such as when you have minimal equity to borrow against. This often means that they come with higher interest than other options which leverage your home equity. Interest is not tax-deductible.

5. Credit Cards

Credit cards are always an option to finance home improvements. However, depending on your particular situation, low credit limits may restrict the size and cost of the projects you can pay for. Credit cards also have relatively high interest rates, so you could end up paying a lot more for your projects.

Credit cards can be a great alternative for low-cost, relatively simple home improvement projects, though.

Start Shopping For Your Home Improvement Loan Today!

Before you decide what option you are going to choose, you’ll want to shop around to make sure that it’s the right choice and the best deal available.

Check out our competitive, low-rate home renovation loans now by clicking the button below.

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