Types of Home Improvement Loans

A home equity loan, also known as a second mortgage, is one of the most popular home improvement loans. With this type of loan, the homeowner uses the equity accumulated in their home as collateral to secure cash financing. A home equity loan is often secured to help finance major expenses. Since home equity loans are secured, if the borrower fails to pay back the money owed, the creditor can take possession of the home to satisfy the debt.

When a home equity loan is used as home improvement loans, it functions essentially like a traditional mortgage. The loan is given one time. Repayment terms and the interest rate are both fixed and predefined. It is often a good idea to use a home equity loan as home improvement loans. The equity that a person has in a home can be used in this way to improve the home and increase the overall market value. By using the equity in a home investment for home improvement loans, a homeowner can actually enhance the investment before a sale. If the home improvements are ones that increase market value, taking out a home equity loan can be a prudent way to maximize a home investment.

Home Equity Lines

types of home improvement loans

Like a home equity loan, a home equity line of credit is a popular source of home improvement loans. Also like a home equity loan, a home equity line of credit uses the equity accumulated in a person's home as collateral to secure financing. Unlike a home equity loan, a home equity line of credit is set up as a line of credit that can be drawn on over time instead of a one-time cash loan. Like a credit card, a home equity line of credit has a set limit that can be borrowed against at the homeowner's convenience.

Unlike a home equity loan, a home equity line has a revolving credit balance. The borrower can borrow against the credit limit at any time, repay the borrowed amount, and borrow again during the loan period, as long as that person's borrowing does not exceed the predetermined credit limit. Because a home equity line of credit can be used on an as-needed basis, it is often a better option for home improvement loans than lump sum home equity loans. This is especially true for homeowners who are looking to make home improvements or renovations over time. A home equity line of credit allows smaller amounts of money to be borrowed and paid back as needed. Because of the structure of a home equity line of credit, homeowners can only pay interest on funds as needed.

Home Improvement Loans

Although home improvement loans often refer to a variety of loans, including home equity loans and home equity lines of credit, some banking institutions also offer specific home improvement loans. Where home equity loans and home equity lines of credit can be used to finance a variety of expenses, home improvement loans are intended specifically for renovation and home improvement.

Home improvement loans often have different requirements than home equity loans and home equity lines of credit. Most often, home improvement loans differ in their requirement of collateral. With a solid credit rating, homeowners can often secure home improvement loans without equity in the home. Because home improvement loans often lack the same collateral requirements of other types of home improvement loans, the interest rate is often much higher. The higher interest rate is the result of the unsecured nature of specific home improvement loans.

Because of the higher interest rates associated with unsecured home improvement loans, this type of loan is often not the best option for homeowners looking to make renovations or home improvements. If a homeowner has enough equity in a home, a home equity loan or a home equity line of credit is probably the more affordable option than home improvement loans. However, homeowners who have purchased a home in need of major repairs or renovations may find that home improvement loans that do not require collateral are the best or only home improvement loans option.

Cash-Out Refinancing

Another option for homeowners looking for home improvement loans is a cash-out refinancing. Unlike taking a second mortgage through a home equity loan, a home equity line of credit, or home improvement loans, a cash-out refinancing allows homeowners to adjust their first mortgage and access cash for home improvement or other financial needs. In a cash-out refinancing, the homeowner refinances the original mortgage for a greater amount that is currently owed. The homeowner then gets the difference in the new mortgage amount in cash that can be used as home improvement loans or to address other financial needs.

Cash-out refinancing is an alternative to home equity loans and home equity lines of credit for homeowners who are looking to use the equity to access cash for home improvement loans without taking on a second loan. If current interest rates are low, a homeowner may be the best option. A cash-out refinancing when interest rates are low, can benefit the homeowner by lowering the overall mortgage amounts owed.

When looking for home improvement loans, there are many available options including home equity loans, home equity lines of credit, home improvement loans, and cash-out refinancing. Each type of home improvement loans has its advantages. Home equity loans, home equity lines of credit, and cash-out refinancing are all viable options for homeowners who want to use the equity in their home to make renovations and improvements to a home. However, for homeowners without accumulated equity that can be used as collateral, home improvement loans that resemble personal loans and do not require collateral may be the best option. If you are trying to decide on the best home improvement loans option for your needs, you should consider elements such as interest rates, amount of equity in the home, and how you need to access the funds.