Taking on a home improvement project can not only improve your current standard of living, but it can increase the value of your property. In fact, it’s always worth considering whether the improvement is likely to result in a healthy return upon selling, especially if you are planning to move on sooner rather than later.

Once you’ve decided to move ahead with your plans, it’s time to figure out how to fund the task, and this is often the tricky bit. Some home improvements can be significantly costly, and not everyone has the money readily available to sink into their property renovations.

There are several options to consider when raising home improvement funds. Here is a guide to the world of home improvement loans for beginners.

Home Improvement Loans

A home improvement loan is as the title implies – a loan that is taken out for the sole purpose of funding home improvement works. That said, this isn’t technically a loan title – it’s a broad term used to describe the reason for taking out a variety of traditional loan types.

Unsecured Home Improvement Loans

An unsecured loan is one that is not secured against any collateral as a guarantee. An unsecured loan is a personal loan, and usually the most common choice for home improvements.

Being that it isn’t secured against any collateral, if you fail to repay a personal loan, the lender does not have the power to seize any of your possessions or property in lieu of payment. That said, it can certainly negatively affect your credit score if you default. Because this form of loan, therefore, represents a higher risk to lenders, they usually come at a higher cost when it comes to the interest rate.

Why are Personal Loans the Most Popular Choice for Home Improvements?

Personal loans are readily available from a wide range of lenders, making it quick and easy to shop around, check your eligibility online, and generally find the best product to suit you. They are also relatively straightforward to arrange, and, depending upon your financial circumstances, you can potentially receive the funds within a couple of days.

With a personal loan, once approved you will receive the money in one lump sum, so it’s important to be capable of disciplining yourself and managing the funds as well as the renovation process.

Secured Home Improvement Loans

Secured loans taken out for the express purpose of carrying out home improvement works are called Home Equity Loans. Unlike personal, unsecured loans, a Home Equity Loan is secured against the property itself, just like a mortgage is. This means that, legally, should you default on your repayments, your lender could rightfully seize your property.

As with a mortgage, this option usually only comes after all other options (such as negotiating staggered repayments or filing for hardship) have been exhausted. Nevertheless, because the loan is secured, there is less risk to the lender and they can subsequently afford to offer the funds for a lower interest rate than an unsecured loan.

What is Home Equity?

Home equity loans are more complex to arrange and the eligibility criteria is more specific. Equity is the term used to describe the dollar value amount of your property that you own outright. For example, if your property is valued at $250,000, and your outstanding mortgage balance is $220,000, then you own $30,000 in positive home equity. The lower your mortgage balance becomes, the more equity you have, until your mortgage is paid off in full and you own 100% of the property.

How Much of My Equity Can I Borrow?

Lenders will allow you to borrow up to 85% of the equity you have in your property, so long as you meet the affordability criteria for repayment, as well as some other underwriting guidelines. This process isn’t as exhaustive as buying a house itself, but there can still be factors such as property inspections and additional costs to consider with this option.

As with a personal loan, once you are approved, you can expect to receive the agreed funds in one lump sum.

Do I Have to Stay with the Same Lender?

Contacting your current mortgage lender is your first port of call, but don’t shy away from shopping around. Although the process can be daunting, remortgaging with a new lender (with the additional home improvement funds tied in) can save you a lot of money in the long run if you find more favorable terms and a lower interest rate elsewhere.

Home Equity Line of Credit

A home equity line of credit (HELOC) is still secured borrowing against the equity in your property, but it works more like a credit card, in that you can use the funds from the line-of-credit as you need to. This can be helpful to best manage a home improvement budget, especially one that will take time to complete. It also means that you are only paying interest on the funds you need to spend as you go and not the whole lump sum from the get-go.

As HELOCs are still secured loans, though, they are still subject to the same underwriting processes as Home Equity Loans, which again makes them more complex to obtain than a personal loan. As with Home Equity Loans, lenders will consider allowing up to 85% of equity borrowing. They also usually require you to hold a minimum of 20% equity in your property to be eligible.

Takeaways

• You will only be eligible to apply for a home equity loan or HELOC if you have equity in your property
• If your credit isn’t great, it may be harder to get approval for an unsecured/personal loan, as it is riskier for the lender
• If your home improvement needs to happen quickly, an unsecured/personal loan usually provides considerably faster processing and funding
• If you want to prioritize saving money, home equity loans are typically provided at lower interest rates than unsecured/personal loans, but make sure you factor any closing costs into your calculations
• If your renovations will take some time, you can save money on interest by opting for a HELOC and only access funds as you need them

Make Sure Your Home Improvements are Well Thought Out

Home improvements are a great way to increase the value of your property, but they must be well-thought-out financially before proceeding.

Make sure you do your research and don’t be afraid to shop around, potentially even for a complete remortgage if it makes financial sense to. Talk to your current lender to assess your options, and consider consulting with a financial advisor to determine your best course of action.