Whether you’ve just moved into a new home or you’re upgrading your existing place, home improvements are not cheap. The national average for a kitchen remodel is $23,166 according to HomeAdvisor.com. Bathrooms can be approximately half of that! Many homeowners need help covering improvement costs but are faced with a variety of confusing loan options. Which loan is better for your situation? We talked to our resident expert, Jill Jameson to get the answers to your questions. Jill has worked for Members Trust for 16 years and understands the “ins and outs” of these loans.
What’s a home equity loan?
A home equity loan taps into the equity in your home as security for a loan. The equity in your home represents the portion of your home that has already been paid off and therefore does not have a mortgage attached to it. In Texas, you can borrow up to 80% of the equity in your home and the loan is for a fixed amount and term. Terms are usually around 15 years and rates depend on how much you borrow. Your home acts as collateral for the loan. You can use the cash from a home equity loan however you see fit – improvements, debt, consolidation, college or business expenses, vacation, etc.
What’s a home improvement loan?
A home improvement loan is a loan secured by your home, so rates can be lower than a personal loan or credit card. A home improvement loan is typically used for medium-sized projects so the terms tend to be shorter than a home equity loan. Proceeds from the loan must be used for home improvement and require that a contractor sign off and complete the work. If someone doesn’t want to go through the process of putting the home up as collateral and it’s a small request (less than $10,000) then a personal loan may be a good alternative.
What’s a construction loan?
A construction loan is a secured loan where your home is used as collateral for the loan. Because it is a real estate loan, rates are usually lower and terms can be between 15-20 years. Proceeds from the loan are paid directly to your contractor and we monitor the work to make sure the work is completed as planned.
When is a home equity loan better?
A home equity loan usually works better for bigger ticket improvements because lenders typically won’t give you as much for an unsecured loan. A secured home equity loan offers a better rate and longer term and provides greater flexibility because you get the cash at closing so you can pay yourself or a contractor. If you have time to work through the application/closing process, a home equity loan may be the less costly option.
When is a home improvement loan better?
There are a couple of different ways that we can set up a home improvement loan, depending on the size of the loan. If it is a smaller loan amount, a home improvement loan can be set up as a personal loan, requiring just a simple personal loan application which can be closed in just a few days. This option is fast and easy.
If you have a larger financial need, this would be similar to a construction or home equity loan and would require a real estate loan application. In this case, this would require you to have equity in your home; however, we can and do consider the increased value of the improvement into the new gross value. For example, if you are building a deck and add a swimming pool for $50,000, it may add some value to your property. We can request an appraisal to determine the increased value and take that into consideration for the equity calculation.
When is a construction loan better?
Like a home equity loan, this works better for more expensive improvements which require a better rate and longer term. This loan is a good option when you know you are going to work with a general contractor for your project.
Renovations and upgrades can not only increase your home value and make your home more appealing to future buyers, but they also make it more enjoyable for you to live in the home. Contact Jill at email@example.com to discuss your options.