If you’re dreaming of a new kitchen, master suite or outdoor deck and you’re not sure how to finance it, there are several options to consider.
From home improvement loans to HELOCs to credit cards, there are likely multiple options that work for you. The key is figuring out the best option for your situation long-term.
In This Article
Your Home as Collateral
Since you’re planning a home improvement, it often makes sense to secure financing for such projects using the equity you have already built up in your home. There are three options for doing this, each of which works a bit differently—but for all of them, you typically need about 20 percent equity in your home.
Equity is the difference between how much you owe on your home and how much your home is worth. For example, if your home is valued at $200,000 and the balance on your mortgage is $160,000, you have $40,000 or 20 percent in equity.
HELOC
The first option is to take out a home equity line of credit or HELOC, which is a revolving line of credit that you can draw on (up to the limit that you are approved for) whenever you need funds. It’s important to understand that a HELOC is a secured loan, which means that your home is used as collateral.
The first option is to take out a home equity line of credit or HELOC, which is a revolving line of credit that you can draw on (up to the limit that you are approved for) whenever you need funds. It’s important to understand that a HELOC is a secured loan, which means that your home is used as collateral.
This variable rate loan is typically tied to the lender’s prime rate, which means that your interest rate can fluctuate up or down.
A HELOC consists of two distinct phases. First is its draw period, when you can take funds as needed and you’re only required to pay down the interest. The draw period lasts anywhere from five to 15 years, depending on your lender. After the draw period ends, the loan converts to its repayment phase, when you make set payments for the remaining balance, typically between 10 to 20 years.
A HELOC works well for borrowers who:
- Have significant equity in their homes
- Are confident about repayment, considering that (as collateral) their homes can be subject to foreclosure
- Like the flexibility of drawing funds as needed over time for various purposes
Prosper now offers HELOCs in select states. Reach out to us today to see if you qualify.
Home Equity Loans
Like a HELOC, a home equity loan works well for borrowers who have significant equity in their homes, high repayment confidence, and who are in these situations:
A home equity loan is similar to a HELOC in that your house is used as collateral, but it is structured differently. This type of home improvement loan serves as a second mortgage on your home that is a one-time, fixed-rate loan tied to longer-term interest rates, typically with a five- to 10-year term.
Like a HELOC, a home equity loan works well for borrowers who have significant equity in their homes, high repayment confidence, and who are in these situations:
- Longer-term interest rates are lower than the short-term rates used for HELOCs
- They know exactly how much money they need upfront for a project
Cash-Out Refinances
The final financing option that uses home equity is a cash-out refinance. In this case, you refinance your entire mortgage with the total new loan amount, including a cash sum that you receive at closing. You have your choice of fixed or variable rate loans, as well as the length of your repayment term.
The final financing option that uses home equity is a cash-out refinance. In this home improvement loan option, you refinance your entire mortgage with the total new loan amount, including a cash sum that you receive at closing. You have your choice of fixed or variable rate loans, as well as the length of your repayment term.
A cash-out refinance works best for borrowers with a lot of equity in their homes in these circumstances:
- The current mortgage rates available are lower than their existing mortgage rate
- They have excellent credit scores to qualify for the best rates
- Desire no restrictions on the use of the money being cashed out
Other Financing Options
Don’t worry if you don’t have much equity in your home — you can still finance your home improvement project using these other two lending vehicles. Both work best for those with good-to-excellent credit scores.
Personal Loans for Home Improvement
Additional benefits of personal loans:
Instead of basing your loan on your home’s collateral, a personal loan is based on your credit score, income, and financial history. There are more personal loan options available today than ever before. Many, including a loan through Prosper, are fixed-rate and fixed-term, which means you’ll know exactly what your payment will be for the life of the loan (and exactly when it will be paid off).
Additional benefits of personal loans:
- Fixed loan payments help you budget your loan repayment into your monthly cash flow
- No need for a home appraisal
Credit Cards
Finally, you can choose to pay for your home improvement with a credit card; just choose wisely. A credit card makes sense when:
Finally, you can choose to pay for your home improvement with a credit card; just choose wisely. A credit card makes sense when:
- You’re eligible for a 0% introductory rate (preferably on a card also offering rewards).
- You’ll be able to pay off the project before the introductory rate period ends.
The Takeaway: Take Your Time With Your Decision
Financing a large project with a home improvement loan is a big decision, so take your time to research and learn about your options so you make a decision that works best for your situation. You shouldn’t rush to select a contractor to complete your project, and the same goes for choosing how and from whom to get your project’s financing.
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IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT.
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means for you: When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.
Eligibility for a HELOC up to $500,000 depends on the information provided in the HELOC application. Borrower must take an initial draw of $50,000 at closing. Subsequent draws are prohibited during the first 90 days following closing. After the first 90 days following closing, subsequent draws must be $1,000 or more (not applicable in Texas). Loans above $250,000 require an in-home appraisal. Loans above $250,000 require title insurance.
The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Spring EQ borrowers get their cash on average in 18 days. The time period calculation to get cash is based on the last 6 months of 2021 loan fundings, assumes the funds are wired, excludes weekends, and excludes the government-mandated 3-day right of rescission grace period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications.
Spring EQ cannot use a borrower’s home equity funds to pay (in part or in full) Spring EQ non-homestead debt at account opening. Minimum draw in Texas is $4,000. To access HELOC funds, borrower must request convenience checks.
Interest rates may be adjusted based on factors related to the applicant’s credit profile, income and debt ratios, the presence of existing liens against and the location of the subject property, the occupancy status of the subject property, as well as the initial draw amount taken at the time of closing. Speak to a Prosper Agent for details.
Qualified applicants may borrow up to 97.5% of their home’s value (not applicable in Texas). This does not apply to investment properties. For Texas HELOCs, qualified applicants may borrow up to 80% of their home’s value.
HELOCs through Prosper may not be available in all states. Please carefully review your HELOC credit agreement for more information.
All HELOCs are underwritten and issued by Spring EQ, LLC, an Equal Housing Lender. NMLS #1464945.
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