Which Type of Loan Should You Get for a Home Remodeling Project?
July 13, 2018
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For most people, their home is more than their largest investment — it’s their private oasis. It’s the place they get away from it all to relax and spend time with their family. When you spend a lot of time at home, it’s only natural to want to make improvements that increase your property’s beauty or utility.
Common remodeling projects run the gamut from adding a deck or room addition to kitchen overhauls and bathroom remodels. Many home remodeling projects can make your home more usable while also increasing its value. Unfortunately, larger remodeling projects can also be insanely expensive. According to the 2018 Cost vs. Value study from Remodeling Magazine, the average major mid-range kitchen remodel cost $63,829 in 2018, while the average bathroom remodel set homeowners back $19,134.
The Best Loans for a Home Remodeling Project
Whether you want to redo your kitchen, add a new bathroom, build a room addition, or create a new outdoor living space, your project won’t be cheap unless you can do all the work yourself. Even then, you will have to pay for supplies and construction materials along with all the tools you’ll need to do the work. For that reason and others, many people who take on huge remodeling projects borrow the money they need instead of saving up the cash.
If you are ready to remodel but need to borrow to bring your project to fruition, here are the loan options you should consider:
Home Equity Loan
Home equity loans are popular for homeowners, who borrow, to remodel their homes for a few reasons. First, the fact that these loans are secured by your home means they often come with lower interest rates than other loans. Home equity loans also tend to come with fixed interest rates and loan terms, which means your monthly payment will always stay the same, too.
Still, home equity loans aren’t perfect. The Federal Trade Commission (FTC) notes that, when it comes to home equity loans, you need to watch out for fees such as the application or loan processing fee, origination or underwriting fee, lender or funding fee, appraisal fee, document preparation and recording fees, and broker fees.
Another downside of home equity loans is that you are usually limited to borrowing up to 85 percent of your home’s value. For that reason, this type of loan won’t work for homeowners who haven’t had enough time to build up considerable equity in their property.
Home Equity Line of Credit (HELOC)
Home equity lines of credit, also called HELOCs, are another popular option for homeowners who want to remodel. These loans are actually a line of credit that works similarly to a credit card, meaning you only have to pay back the funds you borrow. But, since they use the equity in your home as collateral, they tend to come with low interest rates.
The interest rate charged by HELOCs is almost always a variable rate, meaning it can go up and down based on an index like the prime rate. Since you only pay back the amounts you borrow, your monthly payment with a HELOC is hard to predict as well. However, HELOCs tend to come with fewer fees than home equity loans, and some come with no fees.
Like home equity loans, HELOCs are usually limited to up to 85 percent of your home’s appraised value. For that reason, you may not qualify for one — or to borrow as much as you need — if you still owe a lot on your primary mortgage.
Personal loans are another type of loan you can consider if you want to remodel your kitchen or bathroom or add an addition to your home. These loans come with a fixed interest rate, fixed repayment term, and fixed monthly payment, and this makes them fairly easy to plan for. Since personal loans are unsecured, however, they typically come with higher interest rates than you would get with a home equity loan or HELOC.
The benefit of personal loans is that you may be able to qualify for one no matter how much you owe on your home. If you don’t have a lot of equity, for example, you can apply for a personal loan and get the funds you need anyway.
Keep in mind that, like other loans on this list, the best rates and terms will go to those with good or excellent credit. If you have poor credit, a personal loan can be especially costly.
0% APR Credit Card
Another financing option to consider for a remodeling project is a 0% credit card. These cards offer 0% APR on purchases for up to 18 months, meaning you can secure an interest-free loan during that time.
Since the 0% introductory offer on these cards is limited, this loan option is best for people who need to borrow for a remodeling project but have the means to pay off their balances fairly quickly.
If you go with a 0% APR card and don’t pay off your balance before your introductory offer ends, you could live to regret it. Let’s say you signed up for the Chase Freedom Unlimited® to secure 0% APR on purchases for 15 months. While zero interest is an attractive proposition, you have to keep in mind that your interest rate will reset once your offer ends. With this card, the regular APR is 17.24 - 25.99% Variable, depending on your creditworthiness! That’s why, if you need to carry a balance for a few years, you may be better off with a different option on this list.
The Bottom Line
If you want to remodel your home to increase your enjoyment or boost its value, it’s almost always best to save for a while so you can pay in cash. By covering your home remodeling budget with cash from your bank account, you can avoid the costs of borrowing and having to make payments on a loan or credit card for several years.
However, saving up the funds for a huge remodeling project like a kitchen overhaul or room addition isn’t always feasible, which is why many people turn to home equity loans, HELOCs, personal loans, and credit cards for help.
Before you borrow money for a home remodel, make sure you read the fine print and compare all your options. Ideally, you’ll find a loan option that comes with the lowest interest rate you can qualify for as well as a monthly payment you can live with.