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How do home improvement loans work?

Friends working on a remodeling project together after they figured out how home improvement loans work to finance their renovation.

Home improvement loans are a great way to finance major renovations or updates to your home.

These loans typically offer lower interest rates than other home improvement financing methods, and you can use them to finance both small and large projects.

Some common uses for home improvement loans include building an addition to your home, repairing damage, or upgrading your kitchen, bathroom, or garage.

Whether you're looking to increase the value of your home or just make it more comfortable to live in, a home improvement loan can be a great solution.

How home improvement loans work

  • Home improvement loans are a great way to finance major renovations or updates to your home.
  • Home improvement loans typically offer lower interest rates than credit cards, and you can use them to finance both small and large projects.
  • Personal loans, HELOCs, cash-out refinances, and home equity loans are popular home improvement loans.

What is a home improvement loan? 

A home improvement loan is a loan that you can use for making improvements or additions to your home.

However, there is no one “home improvement loan” — they can come in the form of a secured loan, such as a home equity loan where the loan is backed by your home equity, or an unsecured loan, which isn’t backed by any collateral. Options range from second mortgages to using a personal loan or credit card.

Most home improvement loans tend to have relatively low-interest rates and flexible repayment terms. So, if you're thinking about making changes to your home, a home improvement loan might be the way to go.

Types of home improvement loans 

Before choosing a home improvement loan, take time to explore your options. Several different types of home improvement loans are available, each with its own benefits and drawbacks.

Home equity loan 

A home equity loan is a type of loan that uses the equity in your home as collateral. Home equity loans typically have lower interest rates than other types of loans, and they can be a good option if you have good credit and sufficient equity in your house.

Before taking out a home equity loan, it's essential to understand the risks involved and make sure you can afford the monthly payments.

So, how does a home equity loan work for home improvements? You can use home equity loans for various purposes, including home improvements, debt consolidation, or other significant expenses. Therefore, home equity loans can be a great way to finance home improvements, whether you're planning to update your kitchen or install new windows.

That’s how some other home improvement loans work as well. Once you qualify, you can use the loan as you see fit. If you’re considering a home equity loan, you can might be interested in reading more about the benefits of using a home equity loan for home improvements.

Home equity line of credit (HELOC)

A home equity line of credit, or HELOC, is a second mortgage that allows you to borrow against the equity in your home.

Unlike a traditional home equity loan, which provides a lump sum of cash up front, a HELOC gives you the flexibility to draw on the loan as needed, up to the approved credit limit.

This can be helpful if you need to make a series of minor improvements over time or want to avoid the hassle and expense of taking out multiple loans. HELOCs typically have lower interest rates than other types of loans, making them an attractive option for home improvement projects. However, HELOCs also come with variable interest rates, meaning interest payments could jump in the future.

Please note: Discover® Home Loans does not offer HELOCs.

Cash-out refinance 

A cash-out refinance is a type of mortgage loan that allows you to borrow against the equity in your home. You can use the proceeds from a cash-out refinance for any purpose, like remodeling or repairing your home, paying off other debts, or making a large purchase.

A cash-out refinance involves refinancing your existing mortgage loan into a new loan for more than you currently owe. The difference between the two loans is then paid out to you in cash. To qualify for a cash-out refinance, you will need to have equity in your home and good credit.

The amount of equity you have in your home may determine how much money you can borrow through a cash-out refinance. If you want to learn how much cash you may be able to get out of your home, you can use the cash-out refinance calculator from Discover Home Loans.

Personal loan 

A personal loan can be a great option for funding home improvements. Unlike a HELOC or a home equity loan, a personal loan doesn't require putting your home up as collateral. That means you won't have to worry about losing your home if you can't make your payments.

While personal loans tend to have higher rates than HELOCs or home equity loans, they do typically have lower interest rates than credit cards, so you'll save on interest over time.

And depending on the lender, you may get a lower rate if you have good credit. If you're considering taking out a personal loan for your next home improvement project, shop around and compare rates from multiple lenders to find the best deal.

Which home improvement loan should you choose? 

Choosing the right type of loan for your needs depends on several factors, including how much money you need to borrow, how much time you need to repay the loan, and whether you're comfortable using your home as collateral.

How much money do you need to borrow?

If you only need to borrow a small amount of money, you may want to consider a personal loan or a HELOC. Personal loans usually have lower interest rates than credit cards, and you can use them for various purposes, including home improvement. HELOCs let you borrow as much, or as little, money as you need.

How much time do you need to repay the loan?

If you need to borrow a larger amount of money or don't have the funds available to repay the loan in full within a few months, you may want to consider a home equity loan or HELOC. These loans usually offer flexible repayment terms, giving you more time to pay off the debt.

What is your credit score?

If you have excellent credit, you may be able to qualify for a credit card with a 0% interest rate introductory period. This could be a good option if you need to make a large purchase and don't want to pay any interest on the debt. However, keep in mind that most 0% interest rate offers only last for 12-18 months, so you'll need to make sure that you can pay off the balance before the intro period ends.

Choosing the right type of loan depends on your individual needs and circumstances. Consider all of your options and compare interest rates, fees, and terms before deciding which loan is right for you.

Final thoughts

A home improvement loan can be a great way to finance renovations or repairs, especially if you don’t have the cash on hand to pay for these projects.

Several types of home improvement loans are available, each with its own set of benefits and drawbacks. When considering which type of loan is right for you, it's essential to think about the size and scope of your project as well as your financial situation.

With more information on the different types of loans, you should be ready to begin shopping around to find the best loan for your upcoming home improvements!

Did you know?

The home equity you’ve earned
can be used in a multitude of
ways. 
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