If your house needs work or you want to make upgrades, but you don’t have the funds you need in a bank account, you have other financing options. You can tap into your home equity or take out a home improvement loan.
Home Equity
Your home equity is the difference between your house’s current value and the amount you owe on your mortgage. If you have built up a significant amount of equity, you can use it to finance a home improvement project. You won’t be able to use 100% of your equity, but you may be able to use a large portion of it.
One way to do that is to secure a home equity loan, which will give you a lump sum that you can use to pay for home improvements. You will have to pay fees and make monthly loan payments at a fixed interest rate. A home equity loan can be a good choice if you have a lot of equity and you plan to make home improvements all at once.
Another option is to take out a home equity line of credit. With a HELOC, you won’t receive a lump sum. Instead, you will have access to a line of credit that you can use as you need it, similar to the way you use a credit card to make purchases. You will have to make monthly payments to repay the amount you use.
Unlike a home equity loan, a HELOC has a variable interest rate. That might make budgeting for those costs more challenging. You may be able to make interest-only payments initially, but your payments will rise significantly later. A HELOC may be a good choice if you’re planning to complete a series of home projects over time.
Home Improvement Loan
You can also take out a home improvement loan. This is an unsecured personal loan, which means you won’t have to use your home as collateral. That makes a personal loan less risky for you, but riskier for the lender.
If you take out a home improvement loan, the interest rate will likely be higher than it would be with a home equity loan or line of credit. Your creditworthiness will also influence your loan terms. You will have less time to pay back a home improvement loan than you would have with a home equity loan or HELOC.
Which Option Is Best for You?
Tapping into your home equity can be a convenient way to finance a project, but it carries risks. If you can’t keep up with your home equity loan or HELOC payments, you may find yourself in foreclosure. Taking out a personal loan may be your best option if you don’t have a significant amount of equity or you don’t want to put your house at risk.
