Types of Home Improvement Loans
There is not an overall best type of loan for home improvement. Your project and financials will determine which one serves best for you.
Three common types of secured loans for home improvement projects include:
- Home equity loans
- Home equity lines
- Cash-out refinancing
And the following two are types of unsecured home improvement loans provided by Midland States Bank:
- Rapid Home Improvement Loans
- Believable Banking Home Improvement Loans
Home Equity Loan
In the simplest terms, a home equity loan is a secured loan in which you can use the equity you built in your home as collateral to borrow money from an institution.
Financial institutions give home equity loans to borrowers in a lump-sum payment. The amount of money will depend on a few different factors, like the financial institution, the amount of equity you have available, and the project you need to fund.
With a home equity loan, it's best to have a predetermined budget before spending. This way, you know how much you can spend and how much you'll repay every month.
Borrowers pay back these loans in fixed installments over a set period. Be prepared to pay both principal and interest as part of these monthly payments. Remember that the shorter your loan term is, the higher your monthly payment will likely be.
Home equity loans also typically have longer repayment terms, perfect for a 10-year home improvement plan.
Home Equity Line of Credit
A home equity line of credit (HELOC), another type of secured loan, also uses your home equity as collateral.
This collateral provides added security for the financial institution, and borrowers can enjoy a lower interest rate compared to an unsecured loan type.
A HELOC gives the borrower access to a line of credit for their ongoing needs as they pay for home improvement projects.
While home equity loans have fixed interest rates, HELOC rates vary by institution. And instead of supplying the money in a lump sum, HELOC provides funds as needed.
Most banks will not extend HELOCs to a borrower unless they meet certain requirements, such as the following:
- Consistent income
- Good credit score
- A certain amount of equity in their home
- Responsible payment history
- Low debt-to-income ratio
With a cash-out refinance, you can use the equity in your home to pay for your next renovation or repair. This secured loan type fits into the category of mortgage refinance.
When you opt for cash-out refi for home improvement projects, you take out a new mortgage on your home. This mortgage will be more than what you owe on the home loan you currently have, but less than your home's current value. Then, you will receive the difference between the loan balance at closing and the new amount you borrowed.
You may be able to do the following when you refinance your mortgage at most financial institutions:
- Shorten your loan term
- Reduce monthly payments
- Lower your interest rate
- Finance your home improvement projects
Unsecured Home Improvement Loans
If you are interested in a loan that does not require equity in your home, then an unsecured home improvement loan may be the best option for you. Because no home equity is required, an unsecured loan is often easier and much faster to get than other types, such as home equity loans.
The terms and amounts available for unsecured home improvement loans will vary based on financial institutions. Midland States Bank's Rapid Home Improvement Loan offers loans up to $25,000 — plenty for most renovation projects. You can enjoy fast cash, meaning the process to get your funds is usually quite speedy. Loan terms usually have longer periods as well. Midland offers up to as much as 15 years*.
Many home types are eligible for this home improvement loan without equity, including the following:
- Single-family detached homes
Borrowers typically have fixed payments for home improvement loans, so you'll never face any surprises and can easily budget around your payments.
Affordable Home Improvement Loan Programs
Another type of unsecured loan offered by Midland States Bank is the Believable Banking Home Improvement Loan. Only select neighborhoods can receive this loan program. The Census Bureau determines which neighborhoods are eligible for this type of program. This affordable home improvement loan program offers many benefits, including the following:
- Flexible credit score requirements
- No mortgage insurance requirement
- Below-market interest rates
- Availability in certain low-to-moderate income areas
- Availability in major-minority census tracts
- Up to 100% loan-to-value
The Believable Banking Home Improvement Loan is an affordable option, but your home's location must qualify for this type of loan.
Another way to borrow money for home improvements that won't take tons of time is by applying for a credit card.
These monetary solutions are handy for ongoing projects that you don't anticipate costing tons of money but are just outside your budget. One of the greatest benefits of using your credit card to cover home improvement costs includes the opportunity to accrue rewards. Just remember that it's important to pay off your balance each month to avoid paying more on interest.
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