There are many methods of paying for home improvements. Home improvement loans can be unsecured or secured by the property. Some require home equity and others do not.
Use a credit card. If the project costs are relatively low (a few hundred to a few thousand dollars) paying by credit card might be a viable option. There might be rewards or cash back involved, and if the homeowner can pay the balance off quickly, it might makes sense — at least there are no loan fees or closing costs. Cards with zero percent introductory rates can give borrowers up to 18 months to pay the balance without accruing interest.
Take out a personal loan. Personal loans require no collateral, unlike home equity financing. This means if the homeowner runs into financial trouble, the personal loan can be included in a bankruptcy proceeding and the home is not at risk for foreclosure. Interest rates are quite low for those with excellent credit. Typical terms range from one to five years for amounts of up to $35,000.
Borrow with a home equity loan. A home equity loan is a mortgage and is secured by a residence. Most lenders limit home equity financing to 80 or 90 percent of the property value. If Homeowner A has a house worth $100,000 and has a mortgage balance of $60,000, there is $40,000 of home equity. However, if Lender B limits loans to 80 percent, only $20,000 of the $40,000 in equity can be borrowed against. Calculate your home equity to determine how much you could access. Home equity loans can have fixed or variable interest rates. At closing, the homeowner gets a lump sum, which is then paid back over time in monthly installments. There are lender fees and the property may be appraised.
Set up a home equity line of credit (HELOC). A type of home equity loan, the home equity line of credit (HELOC) is also a mortgage and also secured by property. Unlike a regular home equity loan, the borrower gets no cash at closing, but can withdraw money when it’s needed. The HELOC is a revolving line of credit, similar to a credit card. HELOCs work well for ongoing projects, when the borrower might need to pay as the renovations progress over time. The interest rate for a HELOC is usually variable, which can make budgeting more difficult.