Home Improvement Loan

The difference between home improvement loans, mortgages, and home equity lines of credit.

Home renovation jobs can be costly, but an increasing number of homeowners are discovering a smart and easy way to pay for needed remodeling and repairs: a home improvement loan, or home equity line of credit. A home improvement loan can come in several different forms. The guidelines below will help you decide which might work for you.

What is a home improvement loan?

A home improvement loan is usually a short-term loan. It's specifically designated for home repair and improvement, or any type of work that will improve the value of your home. A home improvement loan can be made unsecured, or as a second mortgage against your home equity.

Home improvement loans offer several benefits. Repayment terms are often very flexible. Some home equity lines of credit require interest-only payment, with full repayment due only when the house is sold. And if you shop carefully, you should be able to secure a home improvement loan with no closing costs and very minimal fees. Usually the larger the home equity loan, the lower the interest rate.

Different types of basic home improvement loans

Unsecured home improvement loan

An unsecured home improvement loan is awarded on the basis of your credit history and income rather than home equity. It's relatively easy to obtain, and is a good choice for small home renovation projects. An unsecured home improvement loan should also be obtainable without closing costs. The downside is that interest rates are typically higher than on home equity-based loans, and the interest paid is not tax deductible.

Second mortgage

If your home needs major improvements, or you wish to add a room or garage to increase the value of your home, a second mortgage might be the best home improvement loan option. A lending institution will only permit you to borrow against equity up to a certain percentage of your home's value, so this type of home improvement loan is recommended only for those who have sufficient equity already accumulated. A second mortgage will also require the same costs and fees as a first mortgage. However, the interest may be tax-deductible.

Home equity line of credit (HELOC)

Many people find that a home equity line of credit, or HELOC, is a better home improvement loan than a second mortgage. The reason is that it works just like a credit line: you only pay interest as you draw on the available credit. If you have equity in your room and a series of smaller home improvement projects you'd like to do over a period of time, this home improvement loan might suit you perfectly. Just make sure you understood all the terms and costs associated with the HELOC.

Refinancing

Refinancing is a much more drastic option than other home improvement loans. A new mortgage is only going to benefit you if you can secure an interest rate lower than your current one.
 

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