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by Holly Johnson
December 17, 2020
by Holly Johnson
December 17, 2020
Dreaming of a new kitchen? A master bathroom with double sinks? An addition to give your family more space? These are all worthwhile goals that could improve the value and utility of the home you have now versus having to move. The problem? Home improvement projects aren't cheap, and in some cases, they can be downright expensive.
According to Remodeling Magazine's 2018 Cost vs. Value Study, the average mid-range kitchen remodel rang in at $63,829 in 2018. Even the average minor kitchen remodel cost consumers $21,198.
Want a new deck? A wooden one would set you back an average of $10,950 that year, while a mid-range backyard patio came in at a cool $54,130 on average.
You get the point. Remodeling your home can be a pricey affair — even if the result is worth it in the end. For that reason and others, many consumers opt to borrow money for home improvement projects.
If you're gearing up for a big project around the house and know you need funds to make it work, make sure to research your options ahead of time.
Home equity loans allow you to borrow a lump sum of money while using the value of your home as collateral. You can typically only borrow up to 85% of your home's value, however.
If your home is worth $300,000 and you have a first mortgage for $200,000, for example, 85% of the home's $300,000 value is $255,000. Since you've already borrowed $200,000 of that value with your first mortgage, you would likely only be able to borrow up to an additional $55,000 with a home equity loan.
Home equity loans come with a fixed interest rate and fixed repayment term, which means you'll also get a fixed monthly payment that never changes. You can also borrow money for up to 30 years, and the interest may be tax deductible if you itemize on your taxes and use the money to make substantial improvements to your home.
Note that if you're considering a home equity loan, you'll want to compare offers yourself. According to the Federal Trade Commission, there's a known scam around home equity loans where a contractor or builder shows up at your door, offers their services on a renovation project for what seems like a good price and offers to help you finance it through someone they know. This "someone" may end up being a lender offering a home equity loan with unfavorable terms that aren't disclosed until after the work has begun.
If you decide to pursue a home equity loan, do the research yourself.
Pros of home equity loans:
Cons of home equity loans:
Home equity lines of credit, which are also called HELOCs, work similarly to a credit card. They work as a line of credit you can borrow against, and you only have to repay the amount you actually use. Like credit cards, HELOCs typically come with variable interest rates that are based on an index and may change over time.
Since HELOCs use your home as collateral, interest rates tend to be lower than other unsecured loan options. Keep in mind, however, that you can typically only borrow against your HELOC during an initial draw period that normally lasts 10 years. After that, you'll move into a repayment period where you can no longer borrow money.
Pros of HELOCs:
Cons of HELOCs:
Personal loans are also popular for home improvement projects since they offer some of the benefits of home equity loans without as much risk. Personal loans are unsecured, meaning they don't require you to put down any collateral. This means that, if you fail to repay, you're not putting your home on the line like you would with a home equity loan or a HELOC (even though you will negatively impact your credit score).
Personal loans also come with fixed interest rates, fixed repayment timelines, and fixed monthly payments — meaning you won't have any surprises along the way. Also note that, since you're not borrowing against your home equity, you can take out this type of loan regardless of how much you owe on your mortgage provided you meet other requirements your lender sets.
Pros of personal loans:
Cons of personal loans: