Getting a Low Interest Home Improvement Loan With Your Equity

Low interest home improvement loans are more available and have a lower interest rate if you are willing to put your home down as collateral. This is often called a second mortgage because you are placing your home equity on the line in order to secure financing for improvements. It is also known as a secured loan. Unsecured loans require no collateral, but they have pros and cons of their own.

Unsecured Loans are Expensive

On the positive side, no collateral is required for unsecured loans. The lender assumes all risk in the case of default. You will not lose your home if you cannot repay the loan for any reason. Because no collateral is required, the loan is available to those individuals who do not have a high amount of equity in their home. Unsecured loans, however, come with their own set of problems. The main drawback to an unsecured loan is the high interest rate.  Because the lender is assuming a high risk, that lender will charge you more. Over the life of the loan your interest rate makes an unsecured loan a highly expensive option for most borrowers. In addition, you must have excellent credit for an unsecured loan. If you do not have financial stability as evidenced through a long, excellent credit history, unsecured loans will be out of reach to you.

Secured Loans Cost Less

Secured loans are easier to get for most people because they involve less risk.  Lenders make these types of loans more accessible to consumers with poor credit because there is collateral.  If you are asset rich but cash poor, you can use those assets to create liquidity through a secured home loan. The most valuable asset most people own is their home. Putting this asset to work will open the possibility to make both necessary and luxury improvements that may pay off in the long run through a higher resale value. The main drawback is the risk of foreclosure. All of your investment into the equity of your home will be wiped away if your home is returned to the bank. You also need equity in your home to apply for a secured home loan. New home owners are not often eligible because they have not built up enough collateral.

Secured Loans are a Better Deal

It can make financial sense to opt for a loan that will cost you less over the life of the loan. Before putting your home on the line, though, it is important to develop an emergency fund. You should have at three month's salary on reserve, should you lose your job, suffer a medical emergency, etc. The only time you should opt for an unsecured home equity loan is when there is insufficient equity to place as collateral or when you do not have collateral.