Home Equity Loans vs. Home Improvement Loans

Kali Hawlk Unison

Home Equity Loans Vs. Home Improvement Loans

Are you considering doing home improvement projects that could boost your home’s value? If so, you might see a great return on your investment when you eventually sell your home. Renovations and upgrades can not only make your home more appealing to future buyers, but they also make it more enjoyable for you to live in the home.

However, these projects often require a lot of cash. If you’re searching for ways to finance your home improvements, you may have come across a variety of options, including home equity loans and home improvement loans.

And at first glance, these two types of loans can look similar – but they are two very different products with different pros and cons.

Here’s the difference between the two — and how to know which one is right for you.

A Home Equity Loan Taps into Your Home Value

A home equity loan typically requires you to have at least 20% equity in your home. If the equity is there, a home equity loan lets you convert some of it to a lump sum of cash.

Once you apply for a home equity loan, a lender will usually order an appraisal to determine the exact value of your home. The amount you can borrow will depend on the amount of equity you have in your home, which is based upon the appraised value of the home and your outstanding mortgage balance (if applicable).

Of course, borrowing money means you eventually need to pay it back, with interest. That can add up to a lot of money.

You can use the cash from a home equity loan however you see fit, which provides homeowners with a lot of freedom to leverage their home as an asset.

A Home Improvement Loan May Not Need Collateral

A home improvement loan is often just like any other kind of personal loan. Lenders may simply call it a home improvement loan to make the product more marketable.

With a personal loan, the lender does not place a lien on your home, so the home is not collateral for the loan.  That means if you default on the loan, the lender cannot foreclose on your home as a way to recover their loss.  Because there’s no collateral, interest rates on these loans may be higher than for other financing options.

That could cost you more over the life of your loan. But it also gives you more flexibility since it is not tied to your home in any way.

True Home Improvement Loans Come with a More Complicated Process

A true home improvement loan will require an appraisal on your home and a professional cost estimation of the project you want to undertake. That’s because they’re specifically designed for homeowners who want to renovate or make updates to their homes.

Lenders will want to see a reasonable estimate of costs before they finance the project. They could work with you throughout the construction, too, to ensure that everything continues to run smoothly and that costs stay in their estimated range.

Lenders may even pay the contractor hired to do the work directly instead of giving you a lump sum of money.

This may sound like a list of negatives, but there are advantages to choosing a true home improvement loan. For one, you’ll have a financial institution on your side when it comes to dealing with contractors and getting the best price for the work done.

Plus, because you can only use the money for an improvement project, it’s like built-in discipline. On the contrary, when you take out a home equity loan, you simply get a chunk of change with no usage requirements. While that flexibility is nice, you might be tempted to use it for more than just investing in your property’s value.

Are There Other Choices?

Both home equity loans and home improvement loans are a form of debt. You borrow money — for whatever purpose — and you need to pay it back in monthly installments in an agreed-upon period of time.

While a home equity loan may provide you with a better interest rate over a home improvement loan, you still have to pay interest – and that can add up, especially when we’re talking about an expensive undertaking like home renovations and construction.

There is another option for homeowners that are uncomfortable taking on more debt.  Unison offers a program called Unison HomeOwner, which gives you the cash you need for your remodeling project in return for sharing in the future change in value of your home when you eventually sell it. This is called a home ownership investment.

It’s a great option for homeowners who want to invest in their homes but aren’t able (or don’t want) to take on more debt and make additional monthly payments. Unison gives you access to the funds you need to make the renovations you want — without the pain of interest charges or monthly payments.

About the Author

Kali Hawlk

Staff Writer

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Kali is a writer, content strategist, and consultant. She has many years of experience writing about personal finance and real estate. She appreciates the chance to educate people about home-buying.

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