Finance Your Home Renovation Project: Getting a Loan
If you’re considering a big home renovation project, you’re probably thinking about financing options. Obtaining a loan for a home renovation can be done in different ways; now you just need to know your options!
What are the types of home renovation loans?
A home renovation is a costly undertaking. However, you don’t necessarily have to pay for it out of pocket. Here are four types of loans you can take out for your renovation project.
- Credit card
- Personal loan
- Home equity loan
- Home equity line of credit
Credit cards are considered the quickest and easiest way to finance your home renovation. This is mainly because you won’t need to fill out a loan application. However, keep in mind that interest rates can be high.
It’s also good to know that credit card limits are typically lower than what your home renovation budget may be. You might want to consider partially financing your renovation with a credit card and only using it for shorter-term projects, this way you know you’ll pay it back quickly and without the risk of high-interest rates.
On the other hand, there are credit cards you can apply for that have a 0% introductory rate. If you can opt for these. The most important thing to take into consideration is the period during which you will need financing. Avoid credit cards for long-term financing and as a general rule. Only resort to them in an emergency, for example in the instance you need an urgent repair.
Like credit cards, personal loans should only be used for emergency repairs and other short-term works. The application process is fast and you can acquire the money quickly (sometimes on the same business day), but the pros list for personal loans pretty much ends here.
Personal loan repayment terms are typically short, often around two to five years, and you’ll generally have to pay closing costs and sometimes even prepayment penalties. A lot of personal loans also have expensive late fees. Your credit score will also be taken into account: the lower it is, the higher your loan rate. Also, keep in mind that the borrowing limits are usually already low, often lower than what a renovation project budget would be.
You can consider applying for a personal loan for your renovation project if you have credit that’s considered good (881-960 in the UK) or excellent (961-999 in the UK) and if you’re only planning to carry out short-term urgent work. This way, it’s possible for you to get affordable rates.
Home equity loan
Equity is calculated by subtracting total liabilities from total assets. In other words, your home equity refers to your existing mortgage loan minus the outstanding balance that you owe. The purpose of this equation is to assess your home’s value.
When you take out a home equity loan, you will be making payments on your loan while simultaneously continuing to make your mortgage payments. Considered to be similar to a “second mortgage”, a home equity loan is provided to you as a single payment upfront.
The interest rate is fixed and low, which allows you to borrow a large amount without worrying about rate buildup as you would with credit cards and personal loans. Repayment terms are usually flexible and can last up to 30 years in some cases.
As you can imagine, a home equity loan is a good idea only if you have a lot of equity built up in your home. It’s also one of the best routes to take if you need to finance a single big renovation project as opposed to small short-term remodelling.
Home equity line of credit
A home equity line of credit (HELOC) is similar to a home equity loan, but it functions more like a credit card. The most important difference to keep in mind is that as opposed to the fixed rates of home equity loans, interest rates for a HELOC can fluctuate over the course of the loan term.
The loan limit is usually pre-approved. With a HELOC, you can borrow money, pay it back and then borrow it again. Because of this system, called a revolving balance, a HELOC would probably be a better option than a home equity loan if you’re planning several smaller works as opposed to one big renovation project.
HELOC loans usually have minimal to no closing costs, so you wouldn’t have to worry about getting into the credit card or personal loan hassle. However, not only are HELOC rates liable to change but they’re also typically higher than home equity rates.
Choosing which kind of loan you’re going to take out for your home renovation depends on several factors according to your specific situation, including
- The nature of your upcoming project
- Your home equity value
- Your credit score
- Your renovation budget
Now that you know what your options are, you can make an informed decision about the best route to take. Overall, perhaps the most important factor to take into consideration is whether your project is a short- or long-term one, as the loan term itself plays an important role in determining the financial soundness of your decision.