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Are you looking to finance your home renovations? Thousands of Americans want to begin home improvement projects every year but require more knowledge of financing opportunities.
Often, they find themselves overwhelmed with the options. For example, personal or home equity loans are two of the most popular choices. But how can you tell which is the right one for you?
Both have distinct advantages and drawbacks—understanding these can help you make an informed decision.
This article compares personal loans and home equity loans, highlighting their pros and cons to help you make the best choice for your home improvement needs.
Start your application with MIDFLORIDA Credit Union.
Why home improvements matter
Strategic home improvements can significantly boost a property's value.
Key areas like kitchens, bathrooms, and outdoor spaces are particularly impactful.
For example, garage door replacements, manufactured stone veneers, and steel entry door replacements tend to generate high returns on investment (ROI).
However, unless you have a significant amount of savings or other funds available, you’ll need to find financing to get the job done.
What is a personal loan?
Personal loans are unsecured and provide a lump sum, typically with a fixed interest rate and repayment term. Because it is unsecured, you don’t need to use your home or other assets as collateral.
Pros of personal loans
- Quick approval process: Personal loans often have a faster approval process than the average home equity loan, giving them a slight advantage for urgent projects.
- No collateral required: As an unsecured loan, you don’t risk losing your home if you default.
- Fixed interest rates: Many personal loans have fixed interest rates, providing predictable monthly payments.
Cons of personal loans
- Higher interest rates: Personal loans are often saddled with higher interest rates versus secured loans, such as home equity loans, because they are riskier for lenders.
- Shorter repayment terms: Personal loans typically have shorter repayment terms, which generally leads to higher monthly payments.
- Lower borrowing limits: The amount borrowed with a personal loan is usually lower than with a home equity loan, limiting your ability to fund large home improvement projects.
What is a home equity loan?
Home equity loans allow you to use the equity in your home you’ve built up since you purchased your home.
As the name suggests, you’re borrowing on your home equity— the difference between the value of your home and your mortgage balance.
A home equity loan will provide a lump sum of cash at a fixed interest rate and a set repayment term. The home itself serves as collateral.
Home equity loans: Pros
- Lower interest rates: Because loans like these are secured by collateral—i.e., your home—they typically feature lower interest rates than personal loans.
- Higher borrowing limits: Because your property secures them, home equity loans usually allow you to borrow more money, making them ideal for larger home improvement projects.
- Fixed repayment terms: With fixed interest rates and repayment terms, you have predictable monthly payments, which can simplify budgeting.
Home equity loans: Cons
- Longer approval process: The approval process for home equity loans can be longer and more complex compared to personal loans.
- Risk to your home: Since your home is used as collateral, you risk losing it if you fail to make payments.
- Closing costs and fees: Home equity loans often have closing costs and fees, which add to the overall expense of the loan.
Comparing personal loans vs. home equity loans
Interest rates
- Personal loans: Typically have higher interest rates due to being unsecured.
- Home equity loans: Interest rates are often lower because your home secures them.
Loan amounts
- Personal loans: Usually provide lower borrowing limits, which may not be sufficient for extensive home improvement projects.
- Home equity loans: Allow for higher borrowing limits, suitable for major renovations and improvements.
Repayment terms
- Personal loans: Shorter repayment terms are more common, meaning higher monthly payments.
- Home equity loans: Feature longer repayment terms, resulting in more manageable monthly payments.
Risk and collateral
- Personal loans: Do not require collateral, so there is no risk to your home.
- Home equity loans: Use your home as collateral, which means you risk foreclosure if you default.
Approval process
- Personal loans: Generally have a quicker and simpler approval process.
- Home equity loans: Involve a more detailed approval process, including a home appraisal and more extensive documentation.
Which loan option is better for home improvements?
When deciding between a personal loan and a home equity loan for home improvements, consider the following factors:
Project size and cost
A personal loan might be sufficient for smaller projects or those with lower costs.
However, for larger renovations that require significant funding, a home equity loan is often the better choice due to its higher borrowing limits and lower interest rates.
Financial stability
A stable income and strong credit profile are good pairings for a home equity loan, which can offer substantial savings over time due to its lower interest rates.
However, a personal loan might be more appealing despite the higher rates if you prefer to use something other than your home as collateral.
Urgency
A personal loan's faster approval process can be advantageous if you need funds quickly. But if you can afford to wait through a longer approval period, a home equity loan provides better terms for extensive projects.
Personal loan vs home equity loan: The bottom line
While both personal and home equity loans have benefits, home equity loans often provide better terms for significant home improvement projects.
Lower interest rates, higher borrowing limits, and fixed repayment terms make them appealing options for homeowners who want to invest in their property.
Start your application with MIDFLORIDA
MIDFLORIDA offers personalized home equity solutions to help you finance your home improvements effectively.
Start your application with MIDFLORIDA today and take the first step toward enhancing your home.
MIDFLORIDA Credit Union does not discriminate against credit applicants on the basis of race, color, religion, national origin, sex, marital or familial status, age (provided the applicant has the capacity to enter into a binding contract), disability, sexual orientation or gender identity; because all or part of the applicant's income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. It is MIDFLORIDA’s policy to observe both the letter and the spirit of the law.
