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.
Either way, the home improvement bug has bitten you, and you’re in good company. According to HomeAdvisor, spending on home improvement projects increased by 17% in 2018 alone.
In 2018 on average, homeowners spent approximately $9,081 on home improvement, maintenance and home related emergencies for the year, which breaks down into the following categories:
• $1,105 for maintenance
• $416 for emergencies
• $7,560 on home improvement.
Your home might be begging for some general updates and improvements, but not all of us have close to $10,000 stocked up in a savings account. 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, you can take a look at our Home Improvement Cost Calculator, which may help you calculate some estimates.
It’s not ideal to take out additional debt load, but instead of waiting for things to get worse to justify fixing them, one option may be to consider taking out a home improvement loan to update features, or improve your day to day comfort. However, just as no two homes are alike, not all home improvement loans are built the same.
So which home improvement loan is right for you? Many homeowners look to tap into the equity in their homes. But home equity loans (which can either be taken in a lump sum and offer both adjustable and fixed rate options or home equity lines of credit (HELOC) which are lines of credit a borrower can draw upon similar to a credit card, usually at an adjustable rate, with an open draw period in which the borrower can pay off and run up the line again over and over for generally a 10 year “draw” period. These home equity loans may not be possible or practical for some borrowers. In that case, some may consider using an unsecured personal loan.
Some of the factors you may consider when pondering between a home equity or personal loan include:
• Size of the project. How big is the project or improvement you’re taking on?
• Equity in your home. How much available equity do you have in order to qualify for the loan amount you need?
• Timeline to obtain funds. How quickly do you need the money?
• Timeline for payback. Depending upon the type, home equity loans can offer up to 30 year terms, personal loans up to 10 years
• Open line of credit. Helocs can be paid off and left open for the revolving draw period of the loan (usually 10 years), personal loans are installment loans funded in a lump sum
• Tax deductibility. Depending upon circumstances, home equity loans or lines of credit may be tax deductible
Read on to understand some differences between home equity or HELOCs and personal loans, and which option might be the right choice for you.
What Is a HELOC?
A HELOC, or home equity line of credit, allows you to pull a certain amount of equity out of your home. Depending on the amount of outstanding mortgages on the property, the market value of your home and the lenders loan criteria, you may qualify for different credit limits. A home equity loan or HELOC can be used to finance anything including things like large home renovations or higher education.
According to a study published by TransUnion in 2017, it is estimated that 10 million homeowners will open HELOCs from 2018 to 2022. In 2018, tappable equity in homes jumped 7%, to a total of $5.8 trillion , largely thanks to rising home prices across the country. This means that homeowners may find themselves with the ability to tap into more equity in their homes.
What Determines the Amount of a Personal Loan?
The approved amount for a personal loan isn’t tied to the value of your home. Typically, personal loans are unsecured, which means they aren’t secured by an asset, such as your home.
Instead, the interest rate and amount you qualify for will be determined largely based on your credit history, income, and employment. You can use a personal loan for a variety of personal reasons, including home projects.
In the second quarter of 2019, there were 38.4 million personal loan accounts in the U.S. According to Experian , personal loan debt is the “fastest-growing debt category” in the country with balances now totaling $305 billion. The average account balance is $16,259 and the average monthly payment is $360.
Exploring Some Advantages of Personal Loans over Home Equity Loans
While you can use a personal loan for a variety of personal reasons, there are a few reasons why a personal loan can have advantages over home equity loans (upfront lump sum) or HELOCs (open line of credit) when it comes to a renovation loan specifically.
1. Personal loans are typically faster and have fewer fees.
The application process for a personal loan is pretty straightforward. Your own financial profile and creditworthiness—e.g., your credit history and earning power—are often the main deciding factors for whether or not you’ll get a loan, for how much and at what terms.
If need more than you can be approved for on your own, you might consider adding a co-borrower. Some personal loans even boast no origination fees.
Home equity loans and HELOCs, on the other hand as secured lending products, are akin to applying for a mortgage loan (in fact, home equity loans are actually second mortgages on your home recorded in subordination with your first mortgage). How much you can borrow depends on several factors, including the determined market value of your home.
Typically, a HELOC will allow you to use up to 90% of the combined loan to value (CLTV) of your home. CLTV is calculated by adding the outstanding amount of the principal balance on your existing first mortgage and the proposed 2nd loan amount for the home equity loan, divided by the home valuation determined by the lender.
Because your 2nd loan amount is primarily determined based on the available equity you have (i.e. the difference between your home’s value and your outstanding mortgage(s), you may have to arrange–and pay for–a home valuation.
Home valuation types can vary depending upon many factors such as the homes combined-loan-to-value (CLTV) of your first mortgage and proposed second mortgage. For instance, if your CLTV is at 75% or lower, it’s likely the lender may only require a desktop valuation in which the computer will read recent like for like sales data.
If you feel the valuation came in low you may be able to request a full appraisal to get every aspect of your home upgrades in the valuation. Usually these full appraisals (interior and exterior) are assigned more frequently to CLTVs of 75% or higher. Full appraisal valuations can take time (which you might not have) and could cost you.
Generally, hiring a home appraiser could cost between $311-$404, but can sometimes fall slightly below or above that range. Depending upon things like the lender you choose (how many loans are they processing)? And other factors such as property location or complexity, it can take from 2 to 4 weeks to close on a HELOC.
If you need funding fast, a personal loan might be the right fit.
2. You get exactly how much you need.
When you borrow a personal loan, or any improvement loan funded in a lump sum, it’s helpful to know how much you will need, since overborrowing could mean paying more in interest than necessary.
For example at SoFi, you can borrow as little as $5,000 or as much as $100,000 (this amount may vary by state). In contrast, when borrowing a HELOC loan, some lenders have higher loan amount minimums. The minimum loan amount can vary from lender to lender or state to state, but generally the lowest amount you can borrow on a secured home equity loan or line of credit is $10,000 .
3. You can start renovating your new home right away.
With a home equity loan or HELOC, you can only borrow against the equity you have – which, if you are a new homeowner, and haven’t made a large down payment, available equity could be limited. You haven’t had enough time to chip away at your mortgage and the market hasn’t yet elevated your home’s price.
The average first-time homebuyer makes a 7% downpayment. With fewer homeowners putting 20% down payment on their home, if you are a first-time homebuyer, you may not have enough equity for a HELOC to make sense.
On the other hand, a personal loan lets you start home improvements regardless of how much equity you have.
4. Your home is not on the line.
With a home equity loan or HELOC, you use your home as collateral, which means an inability to repay could result in you going into default and your home going into foreclosure. While failing to pay your personal loan carries its own risks, 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 normally offered on a secured lien such as a home equity loan or HELOC, although the loan terms tend to be longer.
Additionally, if you take equity out on a line of credit, you can continue to draw on the HELOC during the draw period, unlike the single one time lump sum of a home equity loan or personal loan. You can think of it sort of like a credit card. You can borrow from your HELOC, start paying it back, and then borrow again on it, up to the limit. With HELOCs you pay on the amount you’ve withdrawn.
While you should try to budget accordingly for home improvement projects and updates, a HELOC might make sense for homeowners working on larger scale projects which may require variable draw amounts at different times.
If you’ve made a large down payment or owned your home for enough time to build up sufficient equity, and you’re looking to undertake large projects, a HELOC may be the right fit for your project.
Also, interest payments on home equity loans and lines of credit could be tax deductible under certain circumstances (when used for certain purposes)—that’s not the case with personal loans.
Personal Loans Can Make Sense For:
Sometimes a personal loan could be the best fit. Here are some instances when it may make sense to borrow an unsecured personal loan over a secured equity loan or HELOC.
• Recent homebuyers. You don’t have enough equity in your home to pull from for a HELOC yet. The HELOC may also come with higher upfront costs (between 2% to 5% of the total line of credit), these fees are usually deducted from the line at loan closing. HELOCs with upfront fees vs no fees could carry different lender margins that affect the interest rate offered and things like early closure fees, so check the fee, margins and other terms when you shop and compare.
• Smaller home improvement loans (e.g, bathroom or kitchen as opposed to full remodel). If you have a clear budget in mind for your project, and it’s on the smaller side, a personal loan might make sense.
• Borrowers in stagnant 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. The process of applying and securing a personal loan is often much faster, and easier, than securing a HELOC. You do have to provide information to the lender, but in most cases, it’s not nearly as involved as a HELOC approval process can be.
Additionally, you don’t have to wait around for the home valuation that can come with a HELOC.
• Borrowers with great credit and cash flow. The higher your credit rating, the less of a perceived risk you are to lenders, having a history of managing your credit well could make it easier to get approved or to obtain better loan terms overall.
While home equity loans and lines of credit are considered a good source of home improvement money if you’ve built up equity in your home and can qualify, 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 or small projects to make your new home just right.
If you’ve decided that a personal loan could be the right move for you, SoFi’s personal loans are absolutely fee-free with no origination fees or prepayment penalties. Qualifying borrowers may be eligible to borrow up to $100,000.
The application can be completed easily online and you’ll have access to customer service 24/7 to help support you throughout the loan process.
Still deciding which home improvement you want to make? Use our Home Project Value Estimator to find out the approximate return value of your next home improvement project.
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