Do you know the difference between a home improvement loan vs home equity loan? It’s not uncommon to think they are the same. Yet, there are some distinct differences between the two types of loans.
Both loans can be used for various purposes, but each has unique advantages and disadvantages. Understanding the structure of these loans can help you make an informed decision on which is right for you. Here’s what you need to know about a home improvement loan vs home equity loan.
Home Improvement Loan vs Home Equity Loan
So what are home improvement loans? Well, they let you borrow money for home-related expenses. This can include repairs, renovations, and upgrades to make your house.
For example, you can use the funds to make your home more energy-efficient or add value to your property. The money can also help you buy furniture or appliances for your house and pay off other debts like medical bills or credit card payments.
A home improvement loan can be obtained through your bank, mortgage company, credit union, or online lender. The amount you qualify for depends on your home’s value and the equity you have in it.
On the other hand, home equity loans allow you to take out a second mortgage on your home. This can give you cash for any purpose. You can use the money to pay off debt, start a business, or for educational expenses.
Differences in Interest Rates
One critical difference between these two types of loans is the interest rate you will pay. Home improvement loans typically come with higher interest rates than home equity loans.
This is because they are considered unsecured loans, which means they are not backed by collateral. Yet, home equity loans are secured by your home and typically come with lower interest rates.
Differences in Repayment Terms
The repayment terms for a home improvement loan vs home equity loan differ quite a bit. Home improvement loans typically have shorter repayment terms than home equity loans. This means you will have to repay your home improvement loan much faster than a home equity loan.
Home equity loans often come with ten years or more repayment terms, depending on the amount you borrow. Having more time to repay the loan can help you plan your finances better.
Loan Application Process
If you are ready to get a home improvement or home equity loan, you must go through an application process to get started. First, you’ll start with a discussion about your needs. The lender will ask you about your financial situation, including income, assets, and liabilities.
For example, you must provide your bank account information and credit history. Sometimes, your lender will ask for additional financial documents to process your application.
This could include income tax returns from previous years; copies of pay stubs or W-2 forms; bank statements showing recent deposits; and proof that you have homeowner’s insurance on your house (if applicable).
The lender will review this information and determine whether you qualify for the loan. If you do, the lender will work with an appraiser to verify the value of your home.
Once approved, the lender will send you a loan agreement to sign. This document will contain all your loan terms and explain how much you can borrow. It will also include how much interest you’ll pay on the loan, when payments are due, and other important information.
Then the next step is submitting all paperwork required by your state’s laws. Once everything has been submitted and both parties agree, the funds will be released from escrow into your account!
It is crucial to remember that this process can take anywhere from one day to several months. It depends on how fast each party responds and the loan terms.
Things to Consider When Using a Home Improvement Loan
If you are looking to secure a home improvement loan, the lender may ask you to provide a list of contractors. If this is the case, you want to present contractors who specialize in home improvement projects similar to yours. Having this information readily available can help speed up the process.
Lenders can also provide recommendations on who to use for the job, which can be helpful to you.
Another thing to be mindful of is spending too much on your remodeling. You don’t want the upgrades that you make your home overly expensive compared to other properties in your area. This can hurt the marketability of your home if you try to sell it in the future.
Things to Consider When Using a Home Equity Loan
When looking to get a home equity loan, the first thing that you need to do is figure out how much money you need. You don’t want to borrow more than you need.
You should also consider how much interest will be charged on loan and how long it will take you to repay it. It is a good idea to have a big picture of your finances before getting a home equity loan.
Which Loan Is Right For You?
Now that you know more about the key differences between a home improvement loan vs home equity loan, you can decide which one is right for your needs.
A home improvement loan is probably better if you need money to improve your home. In contrast, if you need access to cash for any number of purposes, a home equity loan is likely the better option.
No matter which type of loan you choose, be sure to shop around and compare interest rates and fees before signing on the dotted line.
If you’re ready to find the perfect loan for your needs, we can help! Loanz specializes in getting you the help you need to tackle your finances. Contact us today to learn more about your financing options.