Home improvements can keep your house in tip-top shape and help you maintain or increase its value. A home equity loan or line of credit, which lets you tap the value in your home, can finance these projects when you don't have the cash on hand.
But what if you have little to no equity in your home? You can still get a home improvement loan with no equity. Here's what you need to know.
[Read: Best Home Equity Loans.]
What Is Home Equity?
Home equity is the difference between the appraised value of your home and what you owe on your mortgage. When your home is worth more than your mortgage balance, you have positive equity.
If the balance of your mortgage exceeds the value of your home, then you have negative equity. This is also known as being underwater or upside down on your loan.
Low or negative equity can happen in a few ways:
You bought your home with a small down payment. Putting 10% or 20% down on a home is a good way to build equity right off the bat. But some mortgage programs need 3.5% or even less as a down payment. If you haven't owned your home long, you may not have had time to build up much, if any, equity.
Your home's value declined. When home values are trending up, you can build equity faster as you pay down your mortgage. On the other hand, if home values start to drop, you could lose equity in your home.
You have other outstanding loans. Another reason you could lack equity: You have a home equity loan or line of credit and haven't paid down much of either that debt or your primary mortgage.
Can You Get a Home Improvement Loan With No Equity?
The short answer is yes, you can get a home improvement loan with no equity.
"For those borrowers who do not have equity in their homes for a traditional home equity or second mortgage loan, borrowers can usually access some form of unsecured home improvement loan or revolving credit," says Ron Haynie, senior vice president of mortgage finance policy for the Independent Community Bankers of America, which represents the interests of the community banking industry. "Most banks will make an unsecured home improvement loan."
You can find five no-equity ways to borrow money for home repairs or renovations.
Personal home improvement loans. Personal loans aren't mortgages and don't require equity. Traditional banks and credit unions fund these loans as well as online lenders.
How does a home improvement loan work? Essentially, this loan is the same as any other type of personal loan.
You borrow a set amount of money that the lender gives you in a lump sum, and you can use it for home repairs and upgrades as needed. Then you repay the loan according to the lender's terms.
The advantage of using this type of home improvement loan is that it's often unsecured. That means you don't need collateral to be approved.
With a traditional home equity loan, on the other hand, your home is the collateral. If you default on the loan, you risk losing your home.
Federal Housing Administration Title I loans. The Department of Housing and Urban Development does not lend money for home improvements but does guarantee home improvement loans for certain borrowers. You can use an FHA Title I loan to improve a home you have lived in for at least 90 days.
If you're getting a loan for less than $7,500, you don't have to use your home as collateral. That means you can borrow even if you don't have home equity.
Keep in mind that you may not be able to use federally backed home improvement loans for all home upgrades.
"They may be used for any improvements that will make your home more livable and useful -- but not for luxury items, such as swimming pools, or to finance work that has already been completed," says Chris de la Motte, co-founder and president of digital mortgage marketplace Simplist.
These loans can be used for energy-efficient updates, such as adding solar panels, or accessibility upgrades, de la Motte adds.
Contractor financing programs. Certain home repairs may not be right for DIY, which means you'll need to call a contractor. Some contractors offer their own financing.
You might be able to finance a new heating and air conditioning unit, for instance, through an HVAC repair company. The terms may be less attractive than what a bank could offer, but you won't need equity.
Personal lines of credit. An unsecured line of credit that does not require collateral could be a good fit for home improvements when you have no equity. You can use your line of credit as needed, giving you flexibility to pay for upgrades.
A line of credit is a little different from a loan with a lump sum of money. A bank or merchant issues a revolving line of credit with a spending limit, and you can either pay off or carry over your balance each month.
As you pay down the balance, you will free up credit. If you carry over, or "revolve" your balance from month to month, you will pay interest on it.
Credit cards. Credit cards are revolving lines of credit. Using a credit card for home improvements when you have no equity could provide a couple of benefits. If you choose an unsecured credit card, you don't need collateral, and your card could earn cash back or other rewards for your purchases.
The caveat: Credit cards can be a more costly way to borrow compared with a home improvement loan, an FHA Title I loan or a line of credit. If you carry a balance, then the interest charges could easily add up if your card charges a high annual percentage rate.
You can find a workaround, though.
"Some cards offer an introductory rate of 0% APR for a defined period of time, which may enable you to pay back some of the costs associated with home repairs before interest and fees set in," de la Motte says.
The key, he says, is knowing you can pay off the balance before the special rate ends to avoid interest charges.
[Read: Best Home Improvement Loans. ]
How Do You Build Equity With Home Improvements?
If you're planning to get a loan for your home improvements, consider the return on your investment. Pay close attention to the issue of cost versus value.
Remodeling's 2018 Cost vs. Value Report indicates that these home improvements offer the best returns:
-- Replacing the garage door
-- Adding stone veneer
-- Replacing the entry door with a steel door
-- Adding a wood deck
-- Minor kitchen remodeling, such as replacing cabinet doors and counters
-- Replacing siding
-- Replacing windows
-- Updating bathrooms
These projects can add value to your home, but you're not likely to get more value back than the cost of the improvement. You could recoup 70% of the cost of a bathroom refresh and about 98% of the cost of a new garage door.
"You should keep an eye on economic indicators to assess whether a home improvement loan will likely be beneficial to your home's value," de la Motte says. "When rates trend higher, a loan could be more costly."
A higher loan cost could offset the value of your home improvements and reduce your monthly cash flow.
[Read: Best Personal Loans.]
What Type of Loan Is Best for Home Improvements?
Choosing how to pay for your home improvement loan depends largely on why you need financing, what you can realistically afford to repay and how likely you are to qualify for a loan.
A credit card might be a better choice than a loan, for instance, if you don't need to borrow a lot. Experian's 2019 report on consumer credit card debt found that the average credit card limit is about $23,000, but your card limits may be lower or higher. If you're applying for a new card, your credit limit at first may be capped at $5,000 or $10,000.
An unsecured personal loan for home improvement, on the other hand, could give you more buying power. Depending on the lender, you might be able to borrow up to $100,000 with no equity or collateral requirements.
As with any other kind of loan, a home improvement loan with no equity requires shopping around. When weighing different loan options, account for:
-- Minimum and maximum loan amounts
-- Loan repayment terms
-- Interest rates and whether they are fixed or variable
-- Collateral or security requirements
-- Loan fees
Also, check the credit score requirements for home improvement loans. Then, check your credit report and score to see how likely you are to be approved before you apply.
If the time isn't right for a loan, think about whether you could delay home improvements until you build equity to get a loan or line of credit. Some repairs cannot wait and others can.
"If you're replacing the roof or a faulty heating and cooling system or repairing storm damage, then those types of improvements can't wait," Haynie says. "If it's adding on a patio or pool or remodeling the kitchen, then it may be better to wait until you have equity."
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