How A Personal Loan For Home Improvements Can Help You Upgrade Your Space
As a homeowner, you have the ability to make changes to your space. If you decide to upgrade your home, those updates could include the home’s value. But many home improvements aren’t easy to pay for upfront. That’s where personal loan home improvements can help.
Let’s explore how this type of loan can help you accomplish your home renovation goals.
What Is A Personal Loan?
If you need some extra cash but don’t want to rack up a credit card balance with a high interest rate, 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. The amount you can tap into will vary based on your financial situation and the lender. You’ll find a range of $5,000 – $45,000. But according to TransUnion®, the average new personal loan is $5,213.
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. The payback period is typically shorter (2 – 5 years). A personal loan’s interest rate depends on your credit score and income.
You can use a personal loan to cover any number of expenses. A few common uses include home improvements, debt consolidation and medical expenses.
How Can You Use A Personal Loan For Home Improvements?
In most cases, you can use a personal loan for anything that you need. So, if you need to make home improvements, you can use a personal loan to cover those costs. But you aren’t limited to covering those expenses.
The Pros Of Using A Personal Loan For Home Improvements
A personal loan is one of many financing options to cover your home improvement costs. Here are the advantages of using a personal loan for home improvements.
Your Home Isn’t Your Collateral
The biggest advantage of getting a personal loan for home improvements is that the new loan isn’t tied to your home. In contrast to other traditional home improvement loans, your home won’t be needed as collateral for a personal loan.
If you aren’t able to keep up with your personal loan payments, the lender cannot kick you out of your home. But if you aren’t able to keep up with a loan that’s using your home as collateral, then the lender would have the right to claim the home.
Ultimately, this lack of collateral lowers the risk for borrowers.
There Are No Restrictions
Personal loans allow you to spend the funds however you see fit. You can choose the size and scope of your home improvements. Plus, change course if necessary along the way.
When you choose a personal loan, you won’t need to worry about violating the terms of your loan based on how you spend the funds.
Loan Amounts Are Smaller
Although you can obtain large personal loans, the average loan amount is a reasonable $5,213. The ability to borrow a relatively small amount helps homeowners avoid taking on more debt than they can afford.
The Cons Of Using Personal Loans For Home Improvements
As with all financial products, there are some disadvantages to using personal loans for home improvements.
You May Have Higher Interest Rates
As a borrower, you can expect higher interest rates with personal loans when compared to secured loans. For example, home equity loans, cash-out refinancing and home equity lines of credit (HELOCs) each tend to have lower interest rates than personal loans.
The reason behind this higher interest rate is the lack of collateral. When you tap into your home’s equity, the lender has a claim to your property if you default on the loan. But that’s not the case with a personal loan. With that, lenders impose higher interest rates on personal loans to mitigate the increased risk.
Your Credit Score Matters A Lot
Your credit score is a relevant factor for any type of loan. But it’s especially important when it comes to an unsecured personal loan. Since you won’t be leveraging the equity you’ve built in your home, lenders take a closer look at your credit score.
A higher credit score allows you to qualify for better interest rates and larger loan amounts. But a lower credit score will lead to higher interest rates and less favorable terms.
Monthly Payments May Be Higher
When taking out a personal loan, you’ll likely find term options of 2 – 5 years. That’s a considerably shorter term than other home improvement loan options. The shorter term, combined with a higher interest rate, will likely result in higher monthly payments.
Other Ways To Pay For Home Improvements
Getting a personal loan for home improvements isn’t the only way to cover this big expense. If a personal loan isn’t what you had in mind for your home improvement needs, then explore the other options on the table.
A credit card might be the most accessible way to pay for your home improvements. That’s especially true if you already have a credit card in your wallet with a high enough limit. You won’t need to fill out another loan application. Instead, you can start covering the costs with your plastic right away.
But there’s a big downside to using your credit card for a home improvement loan. That’s the high interest rates associated with credit cards. That higher interest rate can mean paying much more in financing costs for the same home improvements.
If you need to get the ball rolling on home renovations immediately, consider credit cards as a temporary solution. But look for a more permanent option in the form of a loan with lower interest rates.
Home Equity Loan
A home equity loan is essentially a second mortgage loan that is based on the equity you’ve built in your home. Equity is the difference between your home’s current value and your outstanding mortgage balance. So, if you own a $250,000 home and still owe $100,000 on the mortgage, then you’d have $150,000 in home equity.
You cannot borrow all of the equity you’ve built in a home. But depending on your situation, you could tap into a relatively high loan amount. After you receive the lump sum loan amount, you’ll make regular monthly payments for a specified number of years.
If you default on the loan, the lender has the right to foreclose on the home. For homeowners able to commit to another mortgage payment and wanting to make a lot of improvements, then a home equity loan could be a good fit.
Home Equity Lines Of Credit (HELOC)
Like a home equity loan, a home equity line of credit (HELOC) is based on the equity you’ve built in your home. But unlike a home equity loan, a HELOC is a revolving line of credit that you can tap into on an as-needed basis.
When using a HELOC, the loan details will feel more like a credit card. That’s because you can draw funds when you need them throughout the draw period. However, you’ll still need to make regular monthly payments to pay off this balance. And remember, this monthly payment is on top of your existing mortgage payment.
If you aren’t exactly sure how much your home renovations will cost, this type of financing gives you the flexibility you need to cover the costs. But you’ll be using your home as collateral for this line of credit. With that, the lender may foreclose on your home if you fall behind on your payments.
A cash-out refinance allows you to take out a new mortgage loan with different loan terms. If you’ve built equity in your home, this loan type allows you to pull out a lump sum.
Of the financing options on this list, you are likely to tap into the lowest possible interest rate through a cash-out refinance. But make sure that you can obtain a lower interest rate than your current mortgage rate before jumping in.
You’ll need to know what the cost of your home improvement project is before finalizing your cash-out refinance. Otherwise, you might not take out enough to finish the project. You won’t be able to pull out funds as needed with this financing solution.
Also, you’ll have significant upfront costs with a cash-out refinance. Essentially, any closing costs you paid for your original mortgage will need to be paid again for your new loan. Typically, closing costs amount to thousands of dollars. Take the time to run the numbers before moving forward with a cash-out refinance.
Is A Personal Loan Right For Your Home Improvement Project?
As you can see, there are plenty of financing options for your home improvement project. But is a personal loan the right fit?
The answer depends on your unique situation. Start by determining how much your home improvements will cost. If you’re looking at a cost of around $5,000, then a personal loan might be the perfect option. But if you’re looking at a project that will cost over $50,000, then a personal loan usually won’t provide the scale of the funding you need.
After determining a price tag, take a look at the amount of equity you’ve built in your home. If you have a sizeable chunk of equity, leveraging it could be the most affordable way to cover your home improvement costs. Consider how this new dent in your home equity will affect your future financial plans.
Finally, look at your credit score. If you have an excellent credit score, the interest rates attached to a personal loan shouldn’t be unreasonably high. But if your credit score is on the lower end, then a loan secured by your home’s equity could be the most realistic solution for your budget.
FAQs About Personal Loans For Home Improvement Projects
What do I need to do to apply for a personal loan?
When applying for a personal loan, you’ll need to provide your personal identification documents, proof of income, your employer’s information and proof of your current residence. You won’t need to provide any details about your home improvement projects.
Who issues personal loans for home improvements?
You can find personal loans for home improvements through banks, credit unions and online lenders. For example, you’ll find personal loans available through Rocket LoansSM.
How can I increase my chances of getting approved for the loan?
If you want to give yourself the best chances for a personal loan approval, pay down existing debt, improve your credit score and avoid any new credit inquiries leading up to your application.
Can I deduct the interest on personal loans from my taxes?
When taking out a personal loan, you usually cannot deduct the interest charges from your taxes. Even if the personal loan is used for home improvements, the interest is not a tax-deductible expense.
If you are looking for a loan with tax-deductible options, then consider HELOCs, home equity loans or a cash-out refinance. Before actually deducting your expense, talk to a tax professional to determine the best optimization strategy.
What documents will I need to provide when I apply for a personal loan?
A few of the documents a lender may ask for include your:
- Driver’s license
- State-issued ID
- Social Security number
- Pay stubs
- Tax returns
- Bank statements
- Employer information
- A utility bill as proof of address
The Bottom Line
A personal loan is one way to pay for your home improvement costs. However, a personal loan is not your only option when it comes to covering this major expense.
If you aren’t sure that a personal loan is right for you, then a cash-out refinance might be the better option. Interested in upgrading your home? Apply for a cash-out refinance with Rocket Mortgage®.