Should You Use a Personal Loan or Home Equity to Fund a Home Improvement Project

Personal loans and home equity are the two most popular options for homeowners who want to fund a home improvement project. Both types of loans are different and they are also provided by different lenders.

Home equity is a type of secured loan that allows you to capitalize on the existing equity of your home. Your home equity is calculated by minusing the mortgage from the market value of your home. For example, if you have a house that is worth $600,000 in the market and you still owe $200,000, your home equity will be $400,000. Usually, you can only borrow up to 80% of your home equity.

Home equity loan has cheaper interest rate because it is a secured loan. Its repayment term is longer and most homeowners take 20 – 30 years to pay it off. If your income is not stable, using a home equity to fund the home improvement project can be risky. You may lose your property if you can’t submit payment by the due date.

Home equity is recommended for big home improvement project that requires funding of a few hundred thousand dollars. Staying with the current mortgage lender is cheaper. If you refinance with another mortgage lender, you may have to pay additional fees.

Personal loans is an alternative for people who don’t have any home equity. It is an unsecured loan so you don’t have to submit your house or vehicle as security. Just like home equity, you borrow a lump sum from the lender and repay it within a scheduled term. Personal loan has shorter repayment term that last from 3 – 7 years.

Since you did not put up any collateral, the lender may be stricter when reviewing your financial documents. If you want the personal loan to be affordable, you need to demonstrate that you have a good credit score.

Personal loan can offer lesser funding than a home equity loan as most lenders only allow you to borrow up to $40,000. There are only a few online lenders that would approve a large loan amount of up to $100,000. If you are carrying out a small home improvement project, personal loans will be the best option for you.

Traditionally, personal loans are obtained from the banks and credit unions. However, nowadays, with internet technology, you can apply for a personal loan from online lender and peer to peer (p2p) lender. In personal loan, neglecting to make repayment on time can have a negative impact on your credit score. Your account may be handed over to the debt collector if you did not make payment for more than 6 consecutive months. If you diligently submit payment every month, you will be able to achieve an ideal credit score after 6 months or longer.