Unsecured Home Improvement Loans
Homeowners might have countless reasons for making substantial home improvements, whether it’s to make their home more livable or increase its value. However, many take the step of tapping into their home equity to fund these projects, a move which often provides a poor return on investment.
An unsecured home improvement loan is a sound alternative to using home equity for renovations and improvements that allows you to increase your home’s value without depleting equity. The following article provides details on how unsecured home improvement loans work, and whether they are the right choice for you.
What is a Home Improvement Loan?
An unsecured home improvement loan is essentially the same as an unsecured personal loan, but with a specific focus and intent. You apply to a financial institution and qualify for a borrowing amount, loan term, and an interest rate that reflects your credit score, income, employment, and other relevant information on your financial status.
The amounts that you qualify for will vary, but unsecured home improvement loans can be devoted to smaller projects like fixing cracks and leaks around the house or more significant ones like building a pool or renovating the kitchen. These projects can either add value to your home or prevent your home from losing value, so home improvement loans provide funds for investment that can see a substantial return.
Some things that you could do to improve your home (and potentially increase its value) with a loan include, but are not limited to:
- Remodel the Kitchen
- Reinvent a Room in the House
- Add Energy-Efficient Windows
- Build a Deck
- Add Energy-Efficient Windows
How to Find an Unsecured Home Improvement Loan
Numerous banks, online lenders, and credit unions offer unsecured home improvement loans, but the difficulty is finding one you can qualify for that also offers the ideal terms and rates for your circumstances. The criteria lenders use to determine eligibility varies: some take only credit history into account, while others consider education and other peripheral factors. Lenders can also differ in the amounts and term lengths they offer. Online lenders often cap their loans at around $40,000, while credit unions and banks can offer larger amounts with longer term lengths.
You should explore various lenders, find the rates and term lengths they offer, and determine which loan offers you qualify for best suit your needs. Make sure you can meet the qualifying conditions for a lender before you apply. Also, pay attention to APR, since it reflects both interest rates and origination fees, which is a better reflection of what you will actually pay than the just interest rate. Try to avoid variable interest rates and inflexible repayment plans that include prepayment penalties.
Pros and Cons of Home Improvement Loans
Home improvement loans are attractive because they provide you with a line of credit that isn’t tied to your home equity, and they can get you funds for quick fixes around the house or significant projects. However, home improvement loans can also carry steep interest rates, with APRs regularly in the 20-30% range, or higher.
The utility of a home improvement loan depends largely on the interest rate you can get, and the value you’ll be adding to your home. If you have poor credit and are stuck with an APR north of 30%, then you will likely get a poor return on your investment. If you have good credit and make renovations that add substantial value to your home, though, a home improvement loan can be worthwhile.
Another important factor is the length of the loan term you qualify for. A shorter term length means much steeper payments, but also less interest owed. So if your primary concern is a return on investment, a shorter term is ideal. However, if you may struggle to keep up with payments over a one, three, or five-year term, then explore lenders who can offer longer repayment terms.
Alternatives to Taking an Unsecured Loan
Home improvement loans are not the only way you can fund home renovations, there are alternative loans for home improvements that may be preferable depending on your financial circumstances and credit history.
Title I Home and Property Improvement Loans
A Title I Home and Property Improvement Loan is a loan insured by the U.S. Department of Housing and Urban Development for the purpose of making a home “basically more livable and useful.” These loans are typically unsecured if they are below the $7,500 cap, so they are also untied to your home equity and function more like a personal loan. Rates for Title I loans are still negotiated with a private lender, but since it is insured by the U.S. government, a Title I loan may be a better option for smaller repairs and renovations.
Home Equity Loan
Home equity, or the amount of the total value of a house that a homeowner has paid off, is often a homeowner’s most valuable asset. Home equity loans allow you to borrow from your home’s equity so you can obtain a substantial line of credit even if you have a poor credit history. If your credit score would leave you stuck with steep interest rates on a personal loan, and you have paid off a significant portion of your mortgage, a home equity loan may be preferable.
While home improvement loans are essentially the same as personal loans, since they can potentially add significant value to your home they may also pay for themselves to some degree. This is only true, though, if you are able to find favorable terms and avoid making huge interest payments for years.
Borrowers with a good credit history who have the ability to repay the loan quickly are best suited for home improvement loans. If you have a credit score that qualifies you for interest rates you cannot afford to pay, then you may want to borrow against your home equity instead, or simply try to save up and fund the project yourself.