4 Home Improvement Financing Options to Consider

Home improvement financing commonly requires some form of collateral. Collateral is used to provide a lender assurance a borrower will not default. Using collateral makes loans less expensive and easier to source; however, using collateral is risky because default leads to a loss of that asset. Consider these methods for securing a loan with or without collateral.

#1 Home Equity Loan

A home equity loan is the most common form of home improvement financing. With this loan option, the portion of your home you already own through your down payment and monthly payments can be used to secure more debt. You will have a second lien on your home. The second lien, though, is subordinate to the first. This means your primary mortgage lender will be paid back first if you enter foreclosure or bankruptcy. Because the home equity lender is issuing a subordinate debt loan, the rate on a home equity loan is typically slightly higher than the rate on a mortgage. It is also common for this loan option to have adjustable rates.

#2 Auto Title Loan

You can use an asset other than your home in order to secure your loan. Another option is your automobile. If you own or partly own your auto, it can be used as a form of collateral on a diverse number of loan options. The main advantage here is you are placing a smaller asset at risk. You may also find better rates if this is your only loan against the car, meaning it would be a senior loan. Despite these advantages, the major problem is often the limits of the loan. Since a car is worth only a fraction of the value of a home, the auto title loan will be much smaller than the possible home equity loan you can secure.

#3 Personal Loan

A personal loan can be used for any item you would like to spend it on. Wedding loans and vacation loans are both examples of personal loans. With most personal loans, there is a choice of either securing the debt with an asset or opting for an unsecured loan. Unsecured personal loans have high rates and low limits. Despite these downsides, this can be a good option for home improvement financing in two scenarios: one, you are uncomfortable risking an asset; two, you would like to build your credit very quickly. Unsecured loans have a bigger impact on your credit when you pay them off.

#4 Credit Card

Credit cards, like personal loans, can also be secured or unsecured with an asset. Most credit cards are unsecured. Credit card financing is unique because it is revolving debt. This means you can pay as much as you want toward the debt each month and pay the balance at your discretion. In terms of home improvement, this can help you make the additional purchases you need in the short term. When you pay down the balance, you will have a renewed credit line for your use. A small, $5,000 limit can provide tens of thousands of dollars in extra spending money.

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