Your home is an investment. When you put time into renovating and updating it, you can increase your home’s value, which can benefit you in the future if you plan on selling your home. But it’s not always that easy to free up the funds to do so.
There are a few options you can pursue to increase your home’s value, but the best option might be to take out a personal loan to fund your next home improvement project. We’ll go over the reasons why in this article.
What Is a Personal Loan?
For those who need some extra cash but don’t want to rack up a credit card balance with a high interest rate, or who may not have enough equity in their home, a personal loan can come in handy.
A personal loan is an unsecured installment loan with a fixed interest rate that is repaid in equal monthly payments. Depending on the lender and your personal financial situation, a personal loan will usually range from $5,000 to $15,000 with a maximum of $35,000, according to Bill Parker, CEO of RocketLoans.
Since the loan is unsecured, meaning the loan isn’t backed by collateral like a mortgage or car loan, the interest rate will generally be higher (typically 5% – 28%) but the payback period is typically shorter (two – five years). A personal loan’s interest rate depends on your credit score and income.
“A personal loan can be used for various things, such as debt consolidation, home improvement, auto and medical expenses, credit card payoff, large purchases and more,” explains Parker.
A personal loan is different from a home improvement loan, which is a loan used exclusively for improving your home’s value without using the equity in your home.
How Does It Compare to Other Home Improvement Financing Options?
There are a few loan options for financing a home improvement project, most of which involve turning the existing equity in your home into cash.
A home equity loan, for example, takes the equity in your home and uses it as collateral. This loan is determined by the value of the property via an appraiser from the lending institution and can range from five – 20 years. It’s a bit riskier for the lender and investor, therefore, it will have a higher interest rate over time. Quicken Loans currently does not offer home equity loans.
Instead of taking a second mortgage out of your home with a home equity loan, a cash-out refinance is a refinancing of your existing mortgage loan, where the new loan is for a larger amount than the existing mortgage loan, and you (the homeowner) get the difference between the two loans in cash.
“You’ll have to pay the interest on the cash that is taken out, in addition to the mortgage amount, which can add up to thousands of dollars over the life of the loan,” says Parker. “The interest payments on all types of home loans are usually tax-deductible.”
The downside of these financing options is that you need to have enough equity built up in your home in order to receive cash, and the interest rates are typically higher, due to the risk of the lender.
Using Your Personal Loan to Fund Home Improvements
If you’re looking for cash to fund your home improvement projects and don’t want to touch the equity on your home or rack up a credit card bill with high interest rates, a personal loan can be the best option.
A personal loan is a great option for those with good credit and income. Depending on the lender and your personal financial situation, you could have the money in your bank account the same day you apply for the loan.
You can use the loan to renovate your home, either with the goals of receiving a return on investment (ROI) during the home selling process or simply making your home more comfortable for your current living situation.
The most popular use of a personal-loan-funded home improvement project is updating the kitchen, as it usually yields a high ROI and attracts more potential buyers, if you plan to sell your home in the near future.
“The number one upgrade with the greatest return would be tackling your kitchen,” suggests Parker. “It could be as little as changing the paint or adding a new backsplash, or going as big as buying stainless steel appliances and adding new countertops. What could cost hundreds initially can turn into thousands for your home value.”
The kitchen isn’t the only room in your home that could benefit from an update. Each room in your home can return value and might even save money in the end. You can even use your personal loan to spruce up the exterior of your home by enhancing its curb appeal.
“One downside may be that the home improvement project you’re working on would not necessarily make you money in return,” warns Parker. “What works for some homeowners may not work for another. Make sure you do your research and find out what works best for you!”
Are you ready to ramp up your new home improvement project? Talk to an expert at RocketLoans today to see if a personal loan is right for your next home improvement project.
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