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Financing Home Improvement Projects Without Using Your Home’s Equity

Special To ETF Trends

This article was originally published on ETFTrends.com.

By Brian Lesko, All Things Finance

If you are a homeowner or thinking about becoming one, then there may be some major projects or renovations that you’d like to do.  These could be expensive such as a kitchen or bathroom remodel or an addition.  If you are planning on financing such an endeavor, then one of the more common things to do is to pull equity out of your house in the form of a loan or refinance and then use the funds for your project.

But what if you don’t have enough equity in your home to do this?  Or, what if you simply don’t want to tap your home’s equity?  Thankfully, you have a few options.  Let’s look at a few of the most common.

Unsecured Personal Loans

An unsecured loan is a loan that is not backed by any collateral such as a house or a car.  Lenders approve these loans based on one’s credit worthiness.  Typically, you will need a credit score above 660 to qualify, and loan amounts range anywhere from $1000 up to $50,000.  These loans are paid back in monthly installments and can be used for almost anything.  Some lenders do have certain restrictions as to what they can be used for, so be sure to check before applying.

Pros

  • Qualifying for these loans is often quick. Since titles or deeds don’t need to be searched, some borrowers can be approved with a simple credit check.  They are often approved same day.
  • A lender can’t seize your property should you default on these loans.
  • If you have good credit, then you might qualify for favorable interest rates. Sometimes close to that of a secured loan.

Cons

  • These loans are riskier for lenders, so interest rates will be higher than other types of financing. Also, be aware of possible fees for late payments.
  • Defaulting may not trigger a seizure of property, but it will negatively impact your credit score, so do the math beforehand to make sure you can comfortably pay the note back.

Unsecured loans are available from most lenders and credit unions.  Lenders typically use a prequalification process, which involves submitting some basic personal information.  Within a few minutes you will receive information on the interest rate, total loan amount, and monthly payment.

Secured Personal Loans 

If your credit isn’t healthy enough to qualify for an unsecured loan, then you may be able to apply for a secured personal loan.  A secured loan is backed by some form of collateral such as your car or your savings.  Be aware that lenders won’t lend the full amount of an asset.  A car worth $10,000 may only qualify you for $5000 in financing.

Secured loans can be used for almost anything with a few possible restrictions.  Lenders may ask what you are planning to do with the money, since things like debt repayment can pose a greater risk than say doing a home improvement project.  Lenders often do not like to see unsecured debt being transferred to secure debt. They are a good option for people who have assets but fair or less than ideal credit.

Pros

  • Secured loans will often have lower interest rates than their unsecured counterparts. Since these loans are backed by assets, they pose less of a risk to lenders.  If your credit is good you may be able to get a favorable interest rate.
  • You may be able to finance a larger amount on a secured loan than an unsecured one. The more collateral that you have the more the lender may extend in financing.
  • Secured loans often will have better repayment terms than unsecured loans.

Cons

  • The largest downside to a secured loan is the possible loss of an asset should you default. If you don’t repay the loan as agreed upon you could lose your car, boat, or a savings account.
  • To compound on the above, not only could you lose assets if you default, but your credit will be damaged as well.

Most lenders who offer unsecured loans will also offer secured ones.  The process gets more involved as the loan and the term get larger and longer.  Interest rates and collateral requirements will vary by lender, the size of the loan, and the length of the loan.

Government Programs

The Federal Government offers an array of home loans, grants, and assistance programs aimed at doing home improvement projects.  Loans and grants are available from various government agencies such as the USDA and HUD programs.  There are also local programs that are designed to achieve the same thing.  Eligibility can depend on age, geographical location, race, and income.

This process can be complicated.  But here is a link to get you started.  From here you can search some of the programs offered, eligibility requirements, and how to contact local representatives.

https://www.hud.gov/topics/home_improvements

Cash

They say cash is king.  And in the world of home improvement it certainly helps.  If you are doing the work yourself, and you don’t mind a project taking an extended period, then cash flowing it as you go could be an excellent strategy.  This is obviously not a form of financing, but I feel it is still worth a mention.

We are currently cash flowing a remodeling project at our cabin.  We’re doing one room at a time and paying as we go.  The project is taking time, as we’ve been at it for about a year now, but we aren’t going into debt over it, and we have the satisfaction of doing the work ourselves.

A downside here is that if you don’t have the ability or desire to do the work yourself, then you will most likely need a large sum up front for a contractor.  Unless you have a large amount of cash, then you will need to secure some form of financing.

In Closing

If you are preparing to do some home improvements and don’t have or want to tap the equity in your home, then thankfully there are some other options.  Various lending products exist, the government may be able to help, and the old tried and true method of cash are all at your disposal.  With some research and planning you can complete some much needed or wanted home projects without tapping into equity.  Hopefully this article gave you some ideas and inspiration.

This article was republished with permission from All Things Finance. View the original article here.

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