Should You Use a Home Loan for Home Improvements? Pros and Cons

Look, whether you hire a professional or perform the work yourself. 

Home improvement projects are NEVER cheap! 

From installing a beautiful new pool or redesigning your landscaping, these projects can run into thousands of dollars.

So, most homeowners rely on a loan to pay for the project. 

But, is using a home loan to pay for repairs a wise thing to do?

Read on to explore the pros and cons of different financing options to determine the best way to fund your home upgrades

Deciding Whether or Not to Use A Home Loan

As with most financial decisions, it is best to know your options. As well as what effect they may have on the property or the individual. 

So, if you are contemplating an addition to a property or a remodel of some sort. It is wise to take a look at the best possible financial options to garner the correct monetary pathway for the project. 

It's true, there are home improvements that save you money. 

For example, simply switching to LED light bulbs us 75% less energy, and last 25 times longer than the traditional glass bulb. 

But, no matter how much money home improvements can save you, or how much they may improve your home's value. 

Taking out high-interest loans may NOT be a good idea

#1 Utilize Cash If Possible

Although not technically a “loan,” cash is king. And it's more desirable than accumulating debt. 

However, since the average bathroom remodel can cost over $15,000, you would have to save for many years to have enough money for such an upgrade.

For smaller projects like a small landscaping project. Cash may be the best option and could also be used as a negotiating tool to obtain a discounted price. 

Pros:

• No Interest Payments: Saves money that would otherwise go to interest on a loan.
• Complete Ownership: Enhancements made to the home are instantly fully owned.
• Simplified Transactions: Avoids the complexities of securing a loan, such as approval delays or credit checks.
• Budget Discipline: Using available cash can encourage sticking to a budget, reducing the risk of overspending.
• Debt Avoidance: Prevents additional debt accumulation, which can be important for financial health.

Cons:

• Limited Budget: Available cash may limit the scope of home improvements.
• Opportunity Cost: Using cash could deplete savings that might be needed for emergencies or other investments.
• Reduced Financial Flexibility: Large cash expenditures can reduce financial flexibility, leaving less available for unexpected expenses.
• Slow Project Progress: Limited funds might mean phasing out projects, leading to longer completion times.

#2 Get Home Equity Line of Credit

Home equity lines of credit, or HELOC’s, are a revolving type of loan. 

Similar to a credit card, they allow a homeowner to borrow money periodically over a set amount of time. Usually, between 5-10 years and you only pay interest on the borrowed amount. 

HELOC loans are best suited for homeowners that tackle smaller projects, like replacing an air conditioning unit or painting the exterior of the home.

These types of loans are often best for projects in the $5,000-$15,000 range. 

Since HELOs are adjustable rate mortgages with fluctuating interest rates, closing costs or application fees are normally not attached. 

However, defaulting on this type of loan can put the home at risk if the debt is not serviced.

Pros of Using a HELOC for Home Improvements:

• Lower Interest Rates: Generally offers lower rates than personal loans or credit cards.
• Flexible Borrowing: Draw money as needed during the draw period.
• Potential Tax Benefits: Interest may be tax-deductible if used for qualifying home improvements.

Cons of Using a HELOC for Home Improvements:

• Risk to Home: The home is collateral, risking foreclosure if payments are not made.
• Variable Interest Rates: Rates can fluctuate, potentially increasing costs over time.
• Impact on Credit Score: Can negatively affect credit score if mismanaged.

#3 Explore a Personal Loan

Personal loans could be a good fit for projects between $15,000-$50,000.

This would work for projects like fixing a roof or remodeling a kitchen. According to Credit Karma, these loans are very easy to apply for and do not require the homeowner to use the home as collateral. 

Interest rates do tend to be higher on a personal loan, but most do not require closing costs or processing fees. 

The duration of this loan can be more flexible than the other types and tends to extend anywhere from 5-10 years. 

In a worst-case scenario, only the personal credit of the borrower would be affected, and the home would not be compromised if the loan went into default.

Pros:

• Flexibility in Usage: Use the loan for any home improvement without specific limitations.
• No Collateral Required: Obtain funds without putting your home or other assets at risk.
• Speed of Funding: Access funds quickly, often within days, which is ideal for urgent projects.

Cons:

• Higher Interest Rates: Typically higher than those of secured loans like home equity loans.
• Credit Score Dependent: Requires a good credit score for favorable rates; poor credit can lead to prohibitive interest rates.
• Non-Tax Deductible Interest: Unlike some home-related loans, the interest paid is generally not tax-deductible.

#4 Obtain Home Equity Loan

Home equity loans are the most popular when it comes to home improvement. 

Banks will only loan to homeowners who have equity established in the property and typically only allow loans up to 85% of that equity.

This type of loan normally lasts around 15 years and is best utilized when one is considering a project larger than $50,000.

For example, installing a pool or adding a bonus room. 

Historically, home equity loans carry lower interest rates, but with low interest rates come hefty closing costs and expensive application fees. 

Additionally, if you default on this type of loan, you may risk losing your home.

Pros:

• Lower Interest Rates: Generally lower than rates on credit cards and personal loans.
• Tax Advantages: Interest may be tax deductible if the loan is used for home improvements.
• Lump Sum: Provides a one-time lump sum, which is useful for large projects.

Cons:

• Risk of Foreclosure: Failure to repay can result in losing your home.
• Upfront Costs: May include fees such as appraisal, originator, and closing costs.
• Decreased Equity: Reduces the amount of equity you have in your home.
• Long-Term Debt: Adds another layer of long-term debt, which requires careful financial planning.

#5 Seek Contractor In-house Financing

Many contractors will offer in-house financing options or payment plans as a means to earn new business. 

Many lawn care companies offer payment plans for any exterior landscape home improvement projects over $5000 spread over six months interest-free. 

This creates a win-win scenario for homeowners and contractors. Contractors get more business, and homeowners can improve their curb appeal.

Creative, direct financing options like this are wonderful ways to complete larger projects done without having to go into debt or putting any home at risk.

Financing Home Improvements: A Comparison of Options

Using a Home Loan for Repairs At the End of the Day

Whatever home improvements you are looking to perform, knowing these tips may save a little time, money, and even a home. 

It is best to do your research on interest rates, what other out-of-pocket expenses can occur, and the duration of the loan when deciding on what path to take. 

Since each type of financing for home improvement vary, individuals must take into account their own personal situation—available income, other upcoming expenses, etc. 

So the answer to “Is it unwise to use loans for home improvement,” can be answered by following these tips. That way you can ensure that you are making the right decision. 

And when it comes to financing home improvement projects and enjoying your newly renovated home. Making the right choice can make all the difference!