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Should you use a personal loan or a home loan to remodel your home?

Your money is working harder

The costs of renovating your home can quickly add up, and they can even be prohibitive, depending on the project you’re taking on. According to Cost vs. Value survey by Remodeling Magazine 2019, this year a minor kitchen remodel will cost you $22,507, a shingle roof replacement costs an average of $22,636, and homeowners paid an average of $47,427 for a medium-sized bathroom addition.

The fact that repairs can be so expensive means that not everyone has the money to pay in full. In many cases, homeowners have to borrow the money they need for a project, and most of the time they use a personal or home loan. Here’s how to decide which option is best for your own renovation project.

Benefits of a mortgage loan

When you own a home, it’s easy to automatically assume that a home secured loan will best suit your needs – and you may be right. Home Equity Loans allow you to borrow against the value of your home and use it as collateral.

Low and fixed interest rates

These secured loans usually come with low interest rates and fair terms. Most real estate loans have a term of 10 to 30 years, making it easy to tailor the loan to your needs and monthly budget. Home equity loans also come with fixed interest rates, fixed monthly payments, and fixed maturities, so they are easy to plan.

Easy application process

You can also compare and apply for a home secured loan online and from the comfort of your home, although you may need an assessment and other steps before you can move on.

tax incentives

As a final benefit, you can write off the interest you pay on your home loan, as long as you list it line by line. Although you cannot deduct interest on home equity if you use the proceeds of a home loan for personal expenses, interest is still deductible if you use your proceeds from the loan to “buy, build, or substantially improve” your home. notes the IRS. (See also: Home Loan or Heloc: Which is Right for You?)

Minuses

There aren’t many downsides when it comes to real estate loans, but there are a few issues to be aware of.

You may not qualify

Depending on how much equity you have in your home, you may not even qualify for this type of loan. According to the Federal Trade Commission (FTC), you can typically only borrow up to 85 percent of the value of your home on a first mortgage and home equity loan. This means that if your home is worth $200,000, you can only borrow up to $170,000 on your first mortgage and home equity loan.

Possibility of foreclosure

Secondly, the fact that you are pledging your home as collateral means that you could lose your property to foreclosure if you stop paying your home loan bills.

Pros of personal loans

Personal loans are popular for home renovations for several reasons.

Fixed payments and interest rates

Like real estate loans, they have fixed monthly payments and a fixed interest rate that will never change.

Your home is not a mortgage

Because personal loans do not require you to pledge your home as collateral, the amount you can borrow is not tied to your net worth. For this reason, they can be a good option if you don’t have a lot of capital in your home but still need to borrow money.

Less bureaucracy

The final reason to consider getting a personal loan is that there are not many hurdles to go through when applying. For example, you don’t need to prove the value of your home, and there’s usually far less paperwork required.

Minuses

While personal loans can be easier to manage and apply for, there are a couple of major downsides.

You cannot deduct interest

One of the problems with using a personal loan for a home renovation project is that you can’t deduct the interest on the loan from taxes, no matter what.

Higher interest rates

Personal loans may carry slightly higher interest rates than equity loans because these loans are unsecured.

Which option is right for you?

After all, home equity loans and personal loans can work well for your home renovation project. Both of them have fixed interest rates and fixed monthly payments that you can easily budget, and either option can allow you to borrow enough money to complete your renovation project.

However, there are many factors to consider before making a decision. For example:

  • How many shares do you have in your house?
  • Do you want to list your home as collateral?
  • How much do you need to borrow?

Also, make sure you factor in any fees associated with both home equity loans and personal loans. Many lenders offer products that do not require processing fees, application fees, or hidden fees, but are usually only for consumers with good or excellent credit history. (See also: 5 Personal Loan Fees You Should Never Pay)

Luckily, it’s easy to compare the terms of a home equity loan and a personal loan online. Some websites, like LendingTree, even let you compare multiple loan options in one place.

No matter what you do, take the time to compare all loan options in terms of their fees, interest rates and repayment terms, as well as the monthly payment you’ll need to make. With enough research, you could get your big project up and running in no time.

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