Home Equity Loan vs Personal Loan for Home Improvement Projects
- February 17, 2021
- 6 min read
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It’s no secret that home improvement projects aren’t cheap. The average cost just to remodel your kitchen can easily surpass $20,000. That’s a lot to invest into a single room. So you can imagine what remodeling your entire home could cost.
Now, it’s safe to assume that most people don’t have that kind of money lying around for big-budget projects. So, what are you supposed to do when you need to modernize your home?
That’s where loans come in; namely, home equity loans and personal loans. Taking advantage of either can mean significantly increasing the value of your property. It may seem like a lot of money to borrow – and it is – but the benefits of doing so can have a big payoff later.
If you aren’t sure which loan you should utilize, you’re not alone. Making this decision is a challenge for many people. Fortunately, your friends here at Seek Capital have done the hard work for you and are ready to share their findings.
We’ll break down both loans and explain when it’s best to use them. As always, we invite you to reach out to us if you need assistance securing a loan. Our loan pros are happy to help you get the funding you need for projects both small and large.
You might be wondering how one loan is any different from another. After all, loans are loans, right? By definition, yes. But some intricacies differentiate them. To help you better understand what sets home equity loans and personal loans apart from one another, let’s explore both in greater detail.
Home Equity Loan Defined
Commonly referred to as a second mortgage, a home equity loan serves to leverage the money you have already paid on your home. Known as home equity, this value gives the lender a guarantee that you will eventually repay your loan offer.
A home equity loan is a type of secured loan, and in this case, one that is secured by your home. But we aware that the lender can seize your house if you fail to make your repayments.
When you take out a home equity loan, you will receive a lump sum, which is usually a fixed amount. In most cases, you borrow as much as 85% of your home’s equity. The terms of this type of loan are often for 15 years. However, you don’t necessarily have to adhere to that length of time.
Home equity loans range between five and 30 years, so you can opt for the term that best suits your financial situation. The rates for home equity loans are about 5%.
Home Improvement Personal Loan Defined
A home improvement personal loan is unsecured, meaning the lender is taking on additional risks. Because of this, personal loans usually come with higher interest rates compared to home equity loans. However, your credit score will play a role in what kind of rate you are ultimately tied to paying. If your personal loan has a higher interest rate, you will have to make larger interest payments over the course of the loan.
Since this type of loan is applied toward improving your home, your repayment terms will be shorter and generally last just a few years. Your account can be sent to collections by the lender if you don’t make your loan payments within the agreed-upon repayment period. Unlike a home equity loan, however, your home can’t be seized. Nor can any other personal assets, for that matter.
Your credit history will be affected, though, so you want to make sure that you stay current on your payments and adhere to your agreed terms.
How Are These Loans the Same?
Both a home equity loan and a personal loan work the same once you are approved. You’ll get the approved amount of your loan and make your agreed monthly payments to your lender.
Over time interest will accrue while the rate stays the same. This is because both loans are fixed-rate. Both loans also help you improve your home’s market value.
Several factors come into play that make a personal loan the better choice. Let’s look at why.
Faster and Easier
There’s no doubt about it, you’re likely going to get your funding a lot sooner, and the process will be less of a hassle. Home equity loans consist of a lot of paperwork, whereas personal home improvement loans require much less of your time.
You’ll need to gather up the past two years’ worth of financial documents for a home equity loan. That alone can be a real pain. Personal loans, on the other hand, generally require only basic info about your identity and what kind of income you bring in.
Home equity loans can take weeks to get you your funding, whereas personal loans take mere days. If you are in a position where you need to make upgrades to your home in a short amount of time, a personal loan is right up your alley and will benefit you the most.
No Equity Required
If you just purchased a house recently and paid on its closing costs, you may have to go with a personal loan by default. As the name implies, a home equity loan requires you to have both decent credit and equity in your home.
This can prove to be a problem, as you will need to have been paying your mortgage for quite some time. It was much easier to get a home equity loan during the days prior to widespread financial crises. Back then, they were given out based on the value of your home.
If current statistics are any indication, it’s unlikely that we’ll see these practices making a comeback any time soon. As such, it’s also unlikely that you’ll qualify for a home equity loan if you don’t have a history of making mortgage payments.
Using Home Equity for Something Else
Personal loans basically let you use the funding for whatever you want. There are many families that rely on the value of their home to send their kids to college, for example. What’s more, others have used their personal loan money to help start their own small business.
If you have other pressing matters that require financial backing, a personal loan will allow you to address your needs while using your home’s equity to make the necessary renovations on your house. For many people, a personal loan simply makes it a lot easier to take care of their needs.
With all of that said, you shouldn’t count out home equity loans. They can be an excellent option for home repairs and improvements that require a sizeable investment, such as those ranging from $25,000 to $60,000.
Lenders usually don’t give out much more than that when it comes to unsecured personal loans. That said, if you’ve paid off most of your mortgage and have stellar credit, you might be able to get a home equity loan that far exceeds the figures above.
What’s more, secured loans often have lower interest rates. Home equity loans usually have a longer loan term than that of personal loans. What does this mean for you? It means you could have much lower monthly payments.
If your home has significant equity and you’ve got plenty of patience and spare time to wait for your app to be approved and your funding delivered to you, a home equity loan might be less costly over the lifespan of the loan.
Of course, as with any loan, you should always shop around and compare your options. The more quotes you can get, the easier it will be to weigh those options and get the loan that makes the most sense for your given situation.
Improving your home is a big deal. You can effectively increase its market value through the assistance of a home equity or personal loan. You may not consider selling now, but you never know what life may bring later on down the road. As such, it pays to be prepared.
If you ever need to take out another loan for any reason, your home’s increased value can help you get a better rate and term. Here at Seek Capital, we would be happy to provide any assistance on your home improvement loan options.
Please feel free to get in touch with us so that our experts can guide you through the process and ensure that you get the best loan for your needs. As always, we look forward to serving you and hope to hear from you soon.
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