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Home Equity Loan for Home Improvements for Good & Bad Credit

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How Does a Home Equity Loan Work For Home Improvements?

Yes. You can take equity out of your house to finance home improvements. A home equity loan is similar to a primary mortgage in that it has a mixed payback period that you can select within a range to match your budget. You’ll also have a fixed interest rate that exists for the life of the loan (it won’t change) and you’ll receive all of your funds via a lump sum payment once you sign the loan. You’ll start accruing interest as soon as the funds are dispersed.

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Learn More About Home Equity Loan for Home Improvements

Home equity loans are generally secured, meaning your home serves as collateral for the loan. If you fail to make your payments, the lender could seize your home.

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Can you take equity out of your house for home improvements?

A home equity loan is not the only way you can take equity out of your house for home improvements. Another option is a home equity line of credit. Like a home equity loan, a home equity line of credit taps into your home's value and uses it as collateral. Typically, both types of financing allow you to borrow up to 80-85% of your home's value minus your outstanding mortgage balance.
However, with a home equity line of credit, you'll be able to consistently borrow money from a line of credit during the draw period – you'll be responsible for making payments on the interest-only. Once the draw period ends, you'll have to start paying on both the principal and the interest. These loans are ideal for projects with an unclear budget or finish date. Like home equity loans, HELOCs offer lower interest rates, but the rates are variable, meaning they can fluctuate over time.
For most homeowners, their homes are their biggest investments. Over time, that investment can grow in value. One way to access that value – and put it to good work – is through a home equity loan. A home equity loan for home improvements is a smart way to finance upgrades or repairs that you need to make to your home.

What is the difference between home equity loans and home improvement loans?

Technically, a home equity loan is a type of home improvement loan – but the two are not synonymous. A home equity loan is a secured loan that uses your home as collateral, while a home improvement loan in general doesn't have to be secured.
Many people refer to unsecured personal loans as home improvement loans. These are better for people who aren't interested in putting their homes at risk or for those who have little equity in your home.
These kinds of loans are also helpful if you need money quickly and don't want to go through the appraisal process to determine your home's value and your equity in it.

What are the benefits of using a home equity loan for home improvements?

There are several distinct benefits of using a home equity loan for home improvements.
First, home equity loans offer lower interest rates than many other types of home improvement loans because the loans are backed by your home. You can get an interest rate that is often far less than what you'd receive with a loan that is not secured.
In many cases, you can also get various tax benefits. As long as you take an itemized deduction (not the standard), you can deduct the interest you pay on a home equity loan. How much you can deduct will be based on your unique financial picture, but generally, you can deduct interest on a home equity loan with a balance of up to $750,000 (for married couples filing jointly).
With a home equity loan, you'll be able to select a payback period that fits your budget. Other types of home improvement loans often have payback terms that are set in stone – with a home equity loan, you might have a little more wiggle room when you sign.
Finally, a home equity loan can help you add significant value to your home, building your equity and making it easier to sell your house for more money later on. Certain projects can give you more than 90% return on your investment, adding significantly to the resale value of your home. If you're planning on selling your home at some point but know that there are areas that could be improved, a home equity loan to finance these home improvements is a smart choice.

What are the drawbacks of using a home equity loan for remodeling?

There are a few important things to keep in mind if you are considering using a home equity loan for remodeling. First, recognize that a major drawback of this kind of loan is that you're going to pay higher interest than you might for a home equity line of credit.
Although home equity loans have fixed interest rates, the percentage points on these loans, on average, tend to be about 2% higher than what you'll pay on a HELOC. You also have to have a certain amount of equity in your home, meaning this isn't an ideal option for someone who recently purchased a home or hasn't paid off very much of the original mortgage balance.
Another downside of a home equity loan is that doing any kind of improvements on your home may increase its value – which is a good thing, of course, and likely your goal when you pay to improve it. However, it's important to make sure that your newly updated home is covered by your insurance – this is a common pitfall faced by many people after doing major renovations.
Getting a home equity loan and remodeling your home is not a guarantee that the home's value will go up. There's some value in updating a home for your own use, of course, but if your ultimate goal is to increase the value of your home, then you'll want to invest the money in value-boosting projects like updating a kitchen, adding a deck, or installing energy-efficient features.
If you need money immediately or over an extended period of time, a home equity loan might not be the right choice for you. If you'd rather chip away at the expenses, a home equity line of credit is ideal, since you'll have access to a constant, steady stream of money. If you need money immediately, you might want to get a personal loan or an unsecured home improvement loan that doesn't require you to put your house up as collateral. Doing so might fetch you a lower interest rate but the process will take longer since the house will need to be appraised.
A final disadvantage of using a home equity loan for remodeling is that it can be tough to anticipate exactly how much it will cost to complete your entire project. If you take out a fixed loan like a home equity loan that's too small, you may not be able to complete the project due to a shortfall of cash. At the same time, you don't want to take out too much – you'll be stuck paying it back plus interest.

How much can you borrow with a home equity loan?

It varies by lender, but usually, you can borrow up to 80-85% of your home's value minus what you owe on your mortgage with a home equity loan.
This final number can also be influenced by your financial situation (including your debt, income, and other factors).

Where do you get a home equity loan?

You can get a home equity loan at just about any bank or local financial institution. However, the process of applying for a home equity loan from a traditional brick-and-mortar bank can be cumbersome and time-consuming, since you'll need to go in during bank hours (which for most people, also happens to be the time that they are at work).
Not only that, but banks aren't always able to be as flexible in their interest rates and repayment terms. Because of this, many homeowners choose to look toward online lenders to help them find the best loans.
Online banks often have brick-and-mortar locations. To find the best bank, make sure you choose one that is FDIC-insured or one that is a legitimate lending service (if not technically a bank).

How do you qualify for a home equity loan?

To qualify for a home equity loan, you will usually need to have around 10-20% equity in your home, though again, this varies depending on the lender.
Equity is the difference between how much you owe on your home's mortgage and its market value.
You will also need to have good credit. Usually, a score higher than 620-660 is preferred by banks, but there are some lenders that do offer finance to individuals with credit scores that are lower than this.
A low debt-to-income ratio is preferred. Again, this varies by the lender, but most prefer a ratio of around 43% or less. This ratio shows that you are not overspending on your home and that you aren't overloaded with other kinds of debt.
In general, having sufficient income is also an important factor when you try to qualify for a home equity loan. Not all lenders list specific income requirements for their home equity loans, but you may be asked to provide income verification information like paystubs or W2s.
Finally, you will also need to have a reliable payment history. This is folded into your overall credit score but lenders may look more closely to see that you've been paying your bills on time – and that you don't have any bills in collection.

How do you apply for a home equity loan?

Before you apply for a home equity loan, take the time to plan. Shop around with various lenders to find the one that offers the best interest rates, repayment terms, customer service, and origination fees. In some cases, an unsecured home improvement loan may make more sense. To check offers for unsecured home improvement loans, click here.

Before determining which type of loan is best, make sure you have a clear budget in place. Because a home equity loan involves a fixed lump sum distribution, it's important that you know exactly how much you want to spend before you dive in. You won't be able to add or subtract more or less money later on. That said, even after obtaining estimates for your project, it's smart to add 10 to 15% to the estimates to accommodate for potential increases in materials or labor.

Be sure to balance your current needs with the potential resale value of your home, if you're planning on selling (or even thinking about selling).

When you're ready to apply, contact the lender you've chosen for more specific application details. Each one varies slightly in terms of what's required and what the process looks like.

Normally, you will have to provide personal identification information like your Social Security Number and address. You will need to submit documents like paystubs, W2s, tax returns, and other paperwork to show that your income and credit history are in line with what the lender is looking for. Of course, your house will also need to be appraised – this is the most time-consuming part of the home equity loan application process, but it's important, since the appraisal will be used to determine how much equity you have in your home.

It can take a few days for the loan to be approved, but once it is, you may have to sign some paperwork and see some funds in your account in just a couple of weeks after starting the whole process.

What are alternatives to home equity loans for home improvements?

A home equity loan is one of the best options to consider if you're working on improving your home, but it's not the only option. A home equity line of credit, as discussed earlier in this post, is also a good choice.
Personal loans from other banks or lenders might be a good option, too. These loans often have higher interest rates than home equity loans or HELOC, but since they're unsecured, you won't have to put your home at risk.
A cash-out refinance is another great option. With this, you'll "cash in" your existing mortgage and then, essentially, buy a new one that's for a larger sum than the original. You'll be able to "cash out" the difference and use that money toward your home improvement expenses.
If your home is older or in poor shape, then you might want to consider an FHA 203(K) Loan. These are backed by the Federal Housing Administration and are designed for people who are still in the process of purchasing their homes. The cost of rehabilitation must be at least $5,000 and the home must fall within certain mortgage limits. However, you can make all kinds of upgrades with this kind of loan and the balance will be wrapped into one single payment – mortgage and home improvements – rather than having two separate loans.

Are home equity loans for home improvement worth it?

Home equity loans for home improvement are generally worth it – provided that you're spending the money on significant upgrades that will increase the value of your home. Remember that there is a difference between equity and return on investment.
Home improvements might increase the equity you have in your home but not return 100% of what you spend – and that's ok. Just be sure to keep these financial projections in mind, particularly if you're planning on selling your home in the near future.
Home improvement projects can add value to your home, and a home equity loan can help finance these projects. Applying for a home equity loan is easy, and you could have the money you need in as little as 24 hours. If you are ready to start your project, visit Acorn Finance to review the best offers from top lenders – and find the one that's perfect for crafting your dream home.

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