Connect with us

Hi, what are you looking for?

Finance for Homeowners

Home Improvement Loans: 5 Ways to Pay for that Dream Project

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.

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

home improvement loans

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

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.

Read more

Join our mailing list

Latest

Investor Center

Today we are sharing performance data from the Prosper Portfolio for September 2021. Highlights from the report include: Performance Update In September, approximately 67%...

Credit Management

The consumer finance sector is highly competitive, and consumers often have many options to transfer and repay debt. For example, credit card companies frequently...

Credit Management

For many families, homeownership is an investment for the future. Buying a home is the largest and longest financial commitment most of us will...

Investor Center

Today we are sharing performance data from the Prosper Portfolio for August 2021. Highlights from the report include: Performance Update In August, approximately 67%...

Credit Management

Today, we are excited to announce the release of our new eBook, Your Ultimate Guide to Debt Consolidation, which is now available to download...

Home Renovations

Home renovation can be a challenging process, but financing your renovation doesn’t have to be. There are many ways to fund your home improvements,...

You May Also Like

Credit Management

Unemployed and looking for ways to borrow money? We’ll reveal what options you have when it comes to accessing emergency loans with no job.

Best Practices

Even before COVID, expensive healthcare costs had many Americans wondering what happens if you don’t pay medical bills. If you’re struggling with medical bill...

Financial Literacy

Financial literacy is the know-how to manage your money and plan for your financial future. If you’re not entirely comfortable with money or aren’t...

Finance for Homeowners

Taking out a HELOC to pay off your mortgage is a common practice among many homeowners today. Read more to find out the pros...

© 2005-2021 Prosper Funding LLC. All rights reserved.