4 Home Improvement Loan Options

Dan Rafter
Written by
Dan Rafter
Read Time: 3 minutes

There are many reasons to renovate your home. Here are a few ways to finance the project. Home renovation is an excellent way to breathe new life into your aging surroundings.

A new kitchen or bathroom can upgrade your life and add value to your home. A new roof, deck-repairs, or a fresh paint job will add to the beauty of your abode and protect your investment. Things like a new HVAC system, new insulation, and more efficient windows can keep you warmer in the winter, cooler in the summer, and save you hundreds of dollars in monthly utility.

Unfortunately, most people find the cost of home improvements prohibitive. That's where a home improvement loan comes in.

However, the first thing that you need to know about home improvement loans is that there is no such thing. This overused term actually describes any number of loans that can be put toward general home improvements. Here are a few of the most popular examples:

1) Home Equity Loan

A home equity loan is a loan where the borrower uses the equity in their home as collateral. The equity in your home is essentially the amount of your loan that you have paid off and therefore "own" in your home. These types of loans are also commonly referred to as "second mortgages" because they are taken out in addition to the first mortgage. Also, these types of loans are usually for a shorter duration of time than the primary mortgage. The loan comes in a lump payment to the borrower and is paid off in regular intervals at a fixed rate.

2) Home Equity Line of Credit

A home equity line of credit is similar to a home equity loan in that you borrow on the equity of your home. However, instead of getting the money as a lump sum, you get it in a revolving fashion much like a credit card. You qualify for a specific amount based on the equity you have in your home. You can take out amounts up to your limit, and as you pay the principle of the loan back, you can use it again - just like a credit card.

One advantage of this type of loan to the regular home equity loan is that you only end up borrowing exactly what you need. The negative side of both of these loans is that you are using your home as your collateral. If you default on the loan, you will likely lose your home. While many people use these loans for home improvements, they can also be used for college or other expenses.

3) Energy Efficient Mortgage

Sometimes, renovations aren't just about fixing the aesthetics of a dated bathroom or kitchen. Sometimes, they are essential to the upkeep of the house and to lowering bills. Replace an aging, inefficient HVAC system and ductwork and you'll save money on bills and have a more temperature-controlled home. An EEM is like a second mortgage that is ultimately rolled into your primary mortgage. For a new house, you can get it when you first get your mortgage. You can utilize this type of loan for an existing home by having it added on during a refinance. Any funds received are earmarked for specific renovations.

4) Cash-out Refinance.

A cash-out or cash-back mortgage refinance is when you refinance your home for more than the outstanding balance on your existing loan. This is usually a strategy used when a property has increased in value. For example, say you bought your house for $200,000 ten years ago and have paid off $90,000 of the loan and still owe $110,000. The house has doubled in value since you purchased it, so it's now worth $400,000. You could do a cash-out refinance where you refinance for $250,000. You use the money to pay off the outstanding $110,000 loan and take the remaining $140,000 in cash for renovations.

If you are looking to make changes to your home but didn't think you could afford it, look into a home improvement loan. I've tried to give you an overview of the most popular types of loans, but dig deeper and you likely find something that is even more closely tailored to your needs.

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