A home improvement personal loan isn’t the only route to covering the cost of your projects. Depending on your financial situation and specific renovation needs, you might want to consider some of the other funding avenues available. Let’s take a look at a few of the most common financing options: A home equity loan allows you to borrow a lump sum of cash worth a certain amount, usually up to 85% of your home’s equity. If you’re a long-time homeowner with lots of equity built up, then a home equity loan could easily cover the cost of renovations. If you’re a new homeowner with relatively little equity, however, then the amount that you are able to borrow will be limited.Home Equity Loan
These types of loans have a fixed interest rate over a long repayment period, between 5 to 30 years. Compare that with the 2 to 7 years of a home improvement personal loan. This means your monthly payments, spread out over a longer period of time, could be quite low and more manageable.
One additional benefit of home equity loans (and HELOCs – see below) is that the interest on them can be tax deductible. The 2017 Tax Cuts and Jobs Act rolled back a number of deductions available and introduced a number of new limitations. Included in this was a new limit on itemized deductions for state and local taxes.
According to a 2018 memo from the IRS, though, home loan interest can still be deducted if the loan funds are used to "build or substantially improve" a home or property that has been used to secure said loan. This means that interest on home equity loans, unlike home improvement personal loans, is still tax deductible when the loan is used for home improvement purposes. As always, you should consult a tax professional regarding your specific circ*mstances.
Unlike a personal loan, however, home equity loans are still secured with your home as collateral. So, if you default on repayment, you could end up losing the very home you’re trying to improve. Home equity loans also include fees that you won’t see with a personal loan. These include closing costs, which can be as high as the original closing costs for your mortgage. Add to that the interest, and the true cost of the loan can quickly stack up.
HELOC
A home equity line of credit, or HELOC, is similar to a home equity loan in that it is based on the accrued equity of your home. It differs, however, in that it’s more like a credit card than a traditional loan. Rather than a lump sum, the lender gives you a line of credit that can be drawn upon during a set period of time – usually 10 years. Once that period of time is up, you enter repayment and are responsible for the amount you borrowed plus interest.
HELOCs typically have adjustable interest rates, meaning it’s harder to know the total cost of the loan beforehand. Rates are usually lower than a personal loan, however. As a secured loan, opening a HELOC means your home will be put up for collateral. Like a home equity loan, if you are unable to make your payments, you forfeit your house.
FHA Title 1 Loan
An FHA Title 1 Loan is a unique home renovation loan that is offered by a traditional lender, such as a bank, and is insured by the Federal Housing Administration (FHA). Because it’s being backed by a federal guarantee, lenders will usually offer lower rates on an FHA Title 1 Loan than they would on a personal loan. You also won’t need to front any collateral if the loan is $7,500 or less. Approval is based on income, payment history and outstanding debts. Lenders offering FHA Title 1 Loans don’t look at your credit score.
However, an FHA Title 1 Loan has more restrictions than other types of home improvement personal loans. For a single-family home, the loan amount is capped at $25,000. A Title 1 Loan can also only be used for a specific type of improvement: one that is permanent and makes your home more livable and/or energy-efficient. That means you likely won’t qualify if you’re trying to add a deck or finance a swimming pool.
