While it is a lengthy process, renovating your home is a fantastic investment that can increase the value of your property. Despite the success of home renovations, most projects can be costly and require financing.
Fortunately, home improvement loans can help homeowners attain the necessary funding to complete projects. However, with many options available, selecting the most suitable option can be daunting.
To get you started, here are the four most common types of home improvement loans and how they work.
Home Equity Loan
Home equity loans utilize the equity of the borrower’s home as collateral, meaning the bank can legally obtain possession of the property should they default on the loan. Once an individual obtains a loan, they must repay the amount over a certain time period.
Equity refers to the paid-off portion of your home’s market value. For instance, you would have $150,000 in equity if your property’s value is $500,000 and the remaining mortgage amount is $350,000. While equity continues to increase as homeowners make more payments, they can borrow up to 85 percent of their accrued amount.
Home Equity Line of Credit (HELOC)
Also known as a HELOC, a home equity line of credit is another option to consider when seeking financing for a renovation project. While it’s similar to a standard home equity loan, this solution functions like a credit card.
HELOCs also utilize the property as collateral to insure the loan; however, this form of financing is a revolving line of credit. Once the borrower obtains a pre-approved limit from the lender, they can pay back the amount and borrow again as long as they keep up with payments.
Cash-Out Refinancing
Cash-out refinancing is a type of loan that replaces an original mortgage by tapping into its existing equity. Like home equity loan options, cash-out refinancing utilizes equity to determine the allotted borrowing amount.
For example, suppose your existing mortgage is $250,000, equity is $100,000, and the intended home renovation project requires $50,000 to complete. Cash-out refinancing may allow you to take out a new loan of $300,000. With this amount, you can pay off your current mortgage and receive the required $50,000 in cash.
Personal Loan
For homeowners who don’t have enough equity on their property, personal loans are viable solutions to consider. Personal loans are relatively straightforward; they allow borrowers to acquire financing for personal use, whether it’s to pay off debt or build a new deck.
Personal loans consist of two subtypes: secured and unsecured loans. While secured loans require a form of collateral to ensure repayment, unsecured options do not. In turn, unsecured loans rely on your financial history to help determine allotted amounts and rates.
From adding a new room to your home or renovating your kitchen, there’s no doubt that home improvements are expensive! Fortunately, you don’t have to pay those costs out of pocket. After learning about the most common types of home improvement loans, you can make a decision with full confidence.
Seeking additional information when considering financing for renovation projects is common, and we at Superior Financial are glad to assist! Our team of experts can provide you with a free consultation to discuss home improvement loan rates to get the ball rolling. For more information, you contact us today by phone, online, or at one of our branches!
