Is A Home Refinance Or Personal Loan Better For Home Improvement Costs

Wouldn’t it be nice to make your home improvement dreams come true? This is a reality for many when they choose to take out a loan for home improvement costs. Having funds at your disposal can allow you to make your home more unique, more efficient, or a little more personalized to you and your family’s wants and needs. No matter the reasons, financial institutions such as Solarity Credit Union are here to help you through the process.

When it comes to funding your home improvement costs, you’ll want to decide what kind of loan makes the most sense to you. For many people, the choice is between a home refinance or a personal loan. The decision of home refinance vs. personal loan really comes down to your specific financial situation, but there are some pros and cons to each that are general for borrowers.

Here is more information on using home refinance vs. personal loans for home improvements.

Personal Loans

While home improvements are an exciting endeavor, they can also be costly. But that shouldn’t discourage you from making them. Many people decide to take out a loan to help cover some, if not all, of those costs. Personal loans often come up when trying to figure out a financing option, and they can definitely help secure the money you need. Although, this may depend somewhat on your situation.

Personal loans could be a better option for you if you’ve just recently become a homeowner. New homeowners usually don’t have much equity built up in their homes, and the value of the home is likely similar to what it was at purchase. Equity is one reason that home refinance is worth it, and if you don’t have that, a personal loan could make more sense for you than refinancing.

Another benefit to personal loans is that there is no collateral required. With a home refinance loan, your home will be used as collateral should you fail to make your payments. Not that you’re planning on not repaying your loan, but should something happen and you’re unable to make payments, your home won’t be at stake with a personal loan.

Personal loans are also a quick and efficient option compared to home refinance options. These loans can be secured in a matter of days, and your repayment plan will be on a fixed monthly payment schedule. This can allow you to budget more effectively and decide if you can truly afford the renovations you’re considering.

Home Refinance

Home refinance, in the form of a cash-out refinance, is another popular way homeowners finance their home improvements. It’s a beneficial option for many reasons, one being that it has the potential to save you money on interest in the long run. If you have owned your home for a little while or think that your home’s value has increased since you’ve purchased it, this may be a good choice for your home improvement costs.

A cash-out refinance is a home loan that allows you to refinance for more than you currently owe on your mortgage. The amount over your current balance is paid to you in cash at closing. With this option, you have access to more money if your home has gone up in value or if you’ve previously paid off a lot of your existing loan. This loan works by using home equity to give you the cash difference.

Home equity is the difference between what you currently owe on your home and what it’s currently worth. This number could be generally high, depending on the housing market and how far you are into your repayment schedule. For example, say your original mortgage was for $150,000, and you’ve paid $50,000 of it so far. If your home’s value has increased to $200,000 since you purchased it, you currently have $100,000 in equity. A certain percentage of that amount—up to 80% in some cases—will be available for you to receive in cash when you do a cash-out refinance, and that is what you could use toward your home improvement costs.

Why Else Refinance?

Home refinance could also be a good option if you’re looking to save money in the future. When you refinance your mortgage, you may have the opportunity to secure a better interest rate, decrease your monthly payment, or extend your repayment period compared with the original loan. Plus, home refinances are known to have much lower interest rates than personal loans, and that extra money you save on interest could be money that goes toward your home improvements.

Another way home refinance instead of a personal loan can save you money is through tax deductions. Mortgage interest has the possibility of being tax-deductible, while a personal loan typically won’t be. Though it is specific to where you live and the tax rules of the area, this is a benefit that can make this loan option worth it for many homeowners.

Which Loan Is Better?

When it comes to home refinance vs. personal loans for home improvement costs, the better option is the one that makes sense for you and your finances. You should consider your specific situation before deciding which loan to choose but also consider the main points from the above paragraphs.

Do you have a lot of equity in your home that’s available to you? If so, you may want to go with a home refinance loan for home improvements. If you don’t have much—or any—equity in your home, and you don’t mind the slightly higher interest rates, then you’ll likely want to opt for a personal loan. Still, these aren’t the only ways to decide which loan is best for you.

If, after weighing each option, you’re still struggling with your decision, you can speak to a professional about home refinance vs. a personal loan. Financial institutions such as Solarity Credit Union are known for having expert staff that can help guide you through this process and figure out what makes the most sense to you.