Understanding Your Home Improvement Loan Options

Getting home improvement loans is something that many people need at some point. Fixing up a house is a great way to build equity. Here are some of the different options that you have for a home improvement loan.

Home Equity Loan

One of the most popular ways that people allocate funds for home improvement is a home equity loan. This type of loan will only be available to you if you own a house that has some equity. After you pay on a mortgage for several years, you will develop equity and can borrow against it. Also, using this type of loan can be very beneficial because it provides great tax advantages. The interest that you pay on the loan can be used as a deduction at the end of the year. With this type of loan, you borrow against the equity and your house is used to secure the loan.

While a traditional home equity loan allows you to borrow a fixed amount of money, you also have another similar option called a HELOC. HELOC stands for Home Equity Line of Credit and it also uses your equity as a source of funds. However, with this method, you simply take money out as you need it. With this type of loan, you may have a variable interest rate. The rate is typically lower than a fixed home equity loan.

Unsecured Loan

Another option that you have for home improvement funds is an unsecured loan. With this type of loan, you do not have to provide any collateral for the loan. You can get this type of loan from your local bank or credit union or online lenders. This type of loan will typically be based on your credit history and therefore requires a good credit score. This loan is your least desirable option because it comes with a high rate of interest. In addition, the interest that you pay on the loan is not tax deductible at the end of the year.

Refinance

Using a cash-out refinance is another method that people use to come up with the money that they need for home improvement projects. This method will also require you to have some kind of equity in your home. You can then refinance your existing mortgage for the full value of the home. You keep the difference between what you owe on the property and what you borrowed. This cash can then be used for your home improvement projects. The interest paid on your new mortgage will be tax deductible.

FHA

The FHA has a great program called the 203k rehab loan. This loan program allows you to borrow funds to fix up a house when you buy it. They have some very flexible terms and do not have the same stringent credit guidelines that you might find with other loans. The FHA also has cash-out refinance programs available to allow you to borrow against your home's equity. The terms of the FHA loans are typically competitive to other private loans in the market.