Home Improvement Loans vs. Home Equity Loans
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When planning a major renovation or remodel, securing the right financing is crucial. Homeowners today have a number of financing options available, but two popular options are home improvement loans and home equity loans. Understanding their differences can help you make an informed decision that aligns with your financial situation and renovation goals.
What are Home Equity Loans?
Home equity loans, or second mortgages, leverage the money you’ve already paid towards your home – your home equity – as a guarantee to the lender that you’ll repay the loan offer. This type of secured loan typically carries lower interest rates than other borrowing options, have longer repayment periods, and even have tax advantages when used for eligible home improvements. Unlike the first mortgage you borrowed when purchasing your home, you typically don’t need a down payment for a home equity loan.
What are Home Improvement Loans?
Home improvement loans, unlike home equity loans, are unsecured personal loans, making the amount you are eligible to borrow different. Instead of considering the value of your home equity, lenders will consider a number of other factors on your application, including your credit history, existing debts and more. Home improvement loans can make good alternatives if you don’t want to use your home as collateral toward a renovation or remodel project. It’s important with these loans to be mindful that you may end up with a higher interest rate which will impact the total amount you owe over time.
When Does it Make Sense to Use a Home Equity Loan?
- Larger Projects: Since this financing option requires you to use your home as collateral, you may be able to borrow more than you would with a home improvement loan, allowing you to complete those larger, more costly renovation projects.
- Lower Monthly Payments: Secured loans such as this tend to come with lower interest rates and can offer longer loan terms, translating to lower and more affordable monthly payments.
- Debt Consolidation: Not only is a home equity loan helpful for your home renovation projects, but it can also be useful for paying off other loan balances and consolidating them into one simple monthly payment.
When Does it Make Sense to Use a Home Improvement Loan?
- Easier Application Process: Like most other secured loans, a home improvement loan will only require basic documentation to verify your identity and income, where as a home equity loan requires more extensive paperwork similar to applying to a mortgage. This makes the application process slightly faster and can be fitting for borrowers on a tight timeline.
- Save Your Home’s Equity: Using a home improvement loan allows you to save your home’s equity for a later project or emergency such as unexpected medical expenses.
Which Option is Best for Me?
When you haven’t built much equity in your home or you’re completing some relatively minor home alterations, a home improvement loan will often be your best bet. However, you may be able to secure more money and lower interest rates with a home equity loan, making it the top option for major projects on a home you’ve owned for a while. The route you take will ultimately depend on your home renovation goals and current financial situation. Consider all of your options to ensure you end up with enough money to complete the renovation and the best interest rates possible to help save you more over time.
Next Steps
Ready to apply? We’re here to help!
- Apply online or make an appointment to visit your local branch
- Read more about Upgrading Your Home with a Home Improvement Loan
Read our other blog articles to help you gain the financial knowledge you need to succeed.