The costs of remodeling your home can add up quickly, and they can even be exorbitant, depending on the project you take on. According to Remodeling Magazine’s 2019 Cost vs. Value study, a minor kitchen remodel would set you back $22,507 this year, replacing a roof with asphalt shingles costs an average of $22,636, and homeowners paid $47,427 on average for a mid-range bathroom addition.
The fact that remodeling can be so pricey means not everyone has the cash 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 loan or a home equity loan. Here’s how to decide which option is best for your own remodeling project.
Pros of home equity loans
When you own a home, it’s easy to automatically assume a home equity loan would serve your needs best — and you could be right. Home equity loans let you borrow against the value in your home and use it as collateral.
Low and fixed interest rates
These secured loans tend to come with low interest rates and fair terms. Most home equity loans last for 10 to 30 years, making it easy to tailor your loan to your needs and monthly budget. Home equity loans also come with fixed interest rates, fixed monthly payments, and fixed repayment timelines, so they’re easy to plan for.
Easy application process
You can also compare and apply for home equity loans online and from the comfort of your home, although you may need an appraisal and other steps completed before you can move forward.
As a final upside, you may be able to write off the interest you pay on your home equity loan, provided you itemize. While you can’t deduct home equity interest if you use your home equity loan proceeds for personal expenses, the interest is still deductible if you use your loan proceeds to “buy, build, or substantially improve” your home, notes the IRS. (See also: Home Equity Loan or Heloc: Which is Right For You?)
There aren’t a lot of downsides when it comes to home equity loans, but there are a few issues to be aware of.
You might 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 your home’s value across a first mortgage and home equity loan. This means that, if your home is worth $200,000, you could only borrow up to $170,000 across a first mortgage and home equity loan.
The possibility of foreclosure
Second, the fact that you’re putting your home up as collateral means you could lose your property to foreclosure if you stop paying your home equity loan bills.
Pros of personal loans
Personal loans are popular for home remodels for a few reasons.
Fixed payments and interest rates
Like home equity loans, they come with fixed monthly payments and a fixed interest rate that will never change.
Your home is not collateral
Since personal loans don’t require you to put up your home as collateral, the amount you can borrow isn’t tied to your home equity. For that reason, they can be a good option if you don’t have a ton of equity in your home but still need to borrow money.
Less red tape
A final reason to consider a personal loan is that there aren’t quite as many hoops to jump through when you apply. You don’t have to prove the value of your home, for example, and there’s typically a lot less paperwork involved.
While personal loans might be easier to manage and apply for, there are still a couple major downsides.
You can’t deduct the interest
One issue with using a personal loan for a home remodeling project is that you cannot deduct the interest on your loan on your taxes no matter what.
Higher interest rates
Personal loans may come with slightly higher interest rates than home equity loans since these loans are unsecured.
Which option is right for you?
At the end of the day, home equity loans and personal loans can both work well for your home remodeling project. They both have fixed interest rates and fixed monthly payments you can easily plan for, and either option could let you borrow enough money to bring your remodeling project to fruition.
Still, there are plenty of factors to consider before you decide. For example:
- How much equity do you have in your home?
- Do you want to put your home up as collateral?
- How much do you need to borrow?
Also, make sure you consider any fees involved in both home equity loans and personal loans. Many lenders offer products that come with no origination fees, application fees, or hidden fees, but those typically only go to consumers with good or excellent credit. (See also: 5 Personal Loan Fees You Should Never, Ever Pay)
Fortunately, it’s easy to compare home equity loan and personal loan terms 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 your loan options in terms of their fees, interest rates, and repayment timelines, along with the monthly payment you’ll need to commit to. With enough research, you could have your big project up and running in no time.