Types of Home Improvement Loans from a Financial Advisor
Pros and Cons of Six Different Borrowing Options.
Remodeling your kitchen could end up costing as much as a new car. However, the upside is that, depending on the scope of the project, investing in your home may actually boost its value.
While paying for renovations in cash is ideal, it’s not always feasible. Fortunately, there are several financing options to explore, such as tapping into home equity, refinancing, FHA home improvement loans, credit cards, or personal loans. Each option comes with its own advantages and drawbacks, so it’s essential to weigh them carefully.
Before borrowing for a renovation, consider two key questions: Will the potential increase in your home's value—and the added enjoyment from the upgrades—justify the expense? And are you in a position to repay the borrowed funds?
Here are some home improvement loan options to help cover the costs of remodeling, along with their pros and cons.
Home Equity Loans
A home equity loan allows you to borrow against the value of your home.
Pros of Home Equity Loans
● If you use the loan for home improvements, the interest might be tax-deductible. This depends on your filing status and when you took out the loan.
● Since the loan is secured by your home, the interest rates are typically lower compared to unsecured loans.
Cons of Home Equity Loans
● Since your home is used as collateral, missing payments could put you at risk of foreclosure in extreme cases.
Home Equity Lines of Credit (HELOC)
A home equity line of credit (HELOC) provides an open credit line that you can access over a set period, allowing you to borrow against your home’s equity as needed.
Pros of Home Equity Lines of Credit
● If used for home improvements, the interest may be tax-deductible, with limits depending on your filing status and when the loan was obtained.
● HELOCs typically have lower interest rates compared to unsecured loans.
● They offer flexibility and convenience, allowing you to borrow as needed.
Cons of Home Equity Lines of Credit
● HELOCs often come with variable interest rates, so your payments could increase if rates rise.
● If you miss payments, you risk losing your home since it serves as collateral.
Cash-Out Refinancing
Cash-out refinancing allows you to replace your current mortgage with a new one, giving you the opportunity to withdraw some of your home equity in the process.
Pros of Cash-Out Refinancing
● You may be able to secure a lower interest rate, especially if you refinance to a shorter term or if current rates are lower than when you took out your original mortgage.
Cons of Cash-Out Refinancing
● The refinancing process can be lengthy and may require an appraisal, along with additional fees.
● The cost of obtaining a new mortgage may negate the benefit of using home equity versus other borrowing options.
● You could end up with less favorable loan terms compared to your original mortgage.
FHA Home Improvement Loans
The Federal Housing Administration (FHA) offers the Title 1 Home Improvement Loan, designed to assist homeowners with limited equity in enhancing their living spaces. For a single-family residence, you can potentially borrow up to $25,000 over a term of up to 20 years. To qualify, you must own the home and have lived there for at least 90 days.
Pros of FHA Home Improvement Loans
● You can borrow up to $7,500 without securing it against your home.
● There are no specific credit score or income requirements for loan approval.
Cons of FHA Home Improvement Loans
● The FHA mortgage insurance premium will be factored into the overall cost of the loan.
● You may be required to demonstrate that the loan funds were used for home improvements.
● The maximum loan amount is capped at $25,000.
Credit Cards
Credit cards provide an unsecured line of credit, with your credit limit and interest rate determined by your credit score.
Pros of Credit Cards
● They offer convenience and flexibility for purchases.
● Promotional interest rates can significantly reduce borrowing costs.
● Many credit cards come with rewards programs that give you cash back on your spending.
Cons of Credit Cards
● If you carry a balance month to month without a promotional offer, you can face very high interest rates.
● Most credit cards have variable interest rates, which means your rate can increase if overall interest rates rise.
Personal Loans
A personal loan is an unsecured loan that typically comes with a fixed interest rate.
Pros of Personal Loans
● With a fixed interest rate, you'll always have a clear understanding of what your monthly payments will be.
Cons of Personal Loans
● There may be fees associated with applying for and obtaining the loan.
● Generally, interest rates for unsecured loans are higher compared to those for secured loans.
Sources:
https://www.fidelity.com/learning-center/life-events/home-improvement-loans
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information