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Home Equity Loans vs Personal Loans for Home Improvement

Maybe you’ve spent too much time watching HGTV and now have visions of turning your kitchen into a chef’s paradise. Or perhaps your master bath is just one shower away from disaster.

If so, you’re not alone. Last year, the Joint Center of Housing Studies for Harvard University reported that the home improvement industry should continue post record-level spending in 2016. For many people, that means borrowing money to pay for those home improvements. If you are trying to figure out how much it would cost to update your home, use our Home Improvement Cost Calculator.

So which home improvement loan is right for you? Many homeowners look to tap the equity in their homes. But home equity loans or home equity lines of credit (HELOC) may not be possible or practical for some borrowers. In that case, consider using a personal loan.

Advantages of Personal Loans over Home Equity Loans

While you can use a personal loan for a variety of reasons, there are a few reasons why a personal loan can have advantages over home equity loans or HELOCs when it comes to a renovation loan specifically.  

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The application process for a personal loan is usually pretty straightforward. Your own financial situation—e.g., your credit history and earning power—is often the main deciding factor for whether or not you’ll get a loan, for how much and at what interest rate. Some personal loans even boast no origination fees.

Home equity loans and HELOCs, on the other hand, are akin to applying for a mortgage loan (in fact, home equity loans are sometimes called second mortgages). How much you can borrow depends on several factors, including the value of your home. Because you can only borrow against the equity you already have (i.e. the difference between your home’s value and your mortgage), you may have to arrange – and pay for – a home appraisal. 

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With a home equity loan or HELOC, you can only borrow against the equity you have – which, as a new homeowner, is probably not much. You haven’t had enough time to chip away at your mortgage and the market hasn’t yet elevated your home’s price. A personal loan lets you start home improvements regardless of how much equity you have.

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With a home equity loan or HELOC, you use your home as collateral, which means an inability to repay could result in your home going into foreclosure. While failing to pay your personal loan carries its own risks (like ruining your credit), it’s not tied to the roof over your head.

 

When Home Equity Loans Make Sense

Personal loans may not be right for every borrower looking for a home improvement loan. For example, if you have significant equity in your home and are looking to borrow a large amount, you might be able to save money with lower interest rates on a home equity loan or HELOC. Also, interest payments on home equity loans and lines of credit can be tax deductible under certain circumstances – that’s not the case with personal loans.

On the other hand, personal loans can make sense for:

*Recent homebuyers
*Smaller home improvement loans (e.g., bathroom or kitchen as opposed to full remodel)
*Borrowers in lower home value markets (if your home value has barely budged since you moved in, you may not have much equity to draw on for a home equity loan)
*Those who value ease and speed
*Borrowers with great credit and cash flow

While home equity loans and lines of credit are a good source of home improvement money if you’ve built up equity in your home, using a personal loan for home projects may be a better alternative if you’re a new homeowner and need to take care of a few updates to make your new home just right. Still deciding which home improvement you want to make? Use our Home Project Value Estimator to find out the resale value of your next home improvement project.

SoFi does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.

Editor’s Note: This is an updated version of a post we originally published in July 2015. We welcome new comments and questions below.

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Cash-Out Refinance vs Home Equity Line of Credit

For most Americans buying a home is the biggest purchase they’ll ever make and the largest asset they’ll ever own. Houses are illiquid assets, meaning that in order for a homeowner to receive cash from the equity they have built they need to sell the home. This is why mortgage lenders have found creative ways to help borrowers tap into their home’s equity by either taking out a home equity line of credit (HELOC) or by completing a cash-out refinance of their current mortgage.

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