A homeowner’s first instinct is to get a home equity loan or credit when they need money for a project home improvement. But in many cases, a personal loan, despite its higher interest rate, is a better choice.
With a personal loan, you know your total borrowing costs at the time you pay for the loan, and you borrow a fixed amount for a certain number of years with a fixed interest rate.
With a HELOC, you borrow different sums at different times. The interest rate is changed with market terms. The initial payments can only interest or interest plus a little more important, while later payments are fully depreciated interest and amortization. With so many variables, there is no way to know your total loan costs in advance.
A home equity loan solves uncertainty problems, yet has disadvantages compared to a personal loan.
Here are 5 reasons to consider a personal loan for your next project home improvement.
1. Your home is less risky
If you can not pay back your home equity loan or HELOC, your lender can eventually exclude because these loans are secured through your home. The efforts are lower with an unsecured personal loan.
While unsecured creditors can place a detention center against your home if you do not pay them – something that many consumers are unaware of – the lien usually only makes selling or refinancing more difficult. It will not be you kicked to the sidewalk as a foreclosure, unless the creditor receives an order from the court to force the sale of your home, which is unlikely.
“The thing to keep in mind is that real estate loans are usually non-mortgage loans,” says Joe Parsons, lender with PFS Financing in Dublin, California, and author of the Mortgage Insider blog. “This means that in most cases, the lender can only look at the property as collateral for the debt. With a personal loan, the lender can continue the borrower’s other assets and income in case of default. “
In other words, negligent on all loans is never a good option. However, an unsecured personal loan can be a lower risk option if you’re financially stable but faced with uncertainty, as any job termination or child education that can not be covered by scholarships.
2. You pay less in interest
An unsecured personal loan is the repayment period is usually 3 to 7 years. An HELOC usually has a 10-year draw period, plus a 20-year repayment period, and home equity loan that gives you 20 to 30 years to pay off. You pay significantly more interest with a HELOC or home equity loan despite their lower prices.
Let’s say you want to borrow 30,000 usd. With the personal loan, you get an interest rate of 10.5% and you choose to repay over 5 years. Your total interest expense would be $ 8,689.
Borrow the same amount with a home equity loan and your interest rate can be 5.25%. Over 20 years, you pay $ 18,517 in interest. An HELOC can start at 4.75 percent, but they will probably cost more than home equity loans over time, as interest rates are close to record low levels and are likely to increase.
3. Keep the borrowing in check
A personal loan does not tempt you to borrow more than you need.
Unlike an HELOC, which allows you to hold the loan for the entire 10-year draw period, a personal loan amount is fixed when your loan is approved.
A home equity loan also locks in your loan amount, but both home equity loans and HELOCs often require you to claim it at least $ 10,000 upon closing. It may also be the minimum for further pulling on a HELOC.
With a personal loan, the least you need to borrow is less. That makes them a great option for lower cost home upgrades like new floors or heating and air conditioning equipment. Minimum varies between different lenders, but the PNC Bank and Lending Club, for example, offers unsecured loans personal loans for as little as $ 1000. Online lender in Good lets you borrow as little as $ 500.
Larger or longer term personal loans sometimes have the minimum borrowing requirements similar to those in a home equity loan and HELOCs, however, then shop around and read the fine print.
4. Home equity is irrelevant
Underwater on your loan? Have just bought your house? You will not be able to get a home equity loan or HELOC because you do not have enough equity.
These loans usually require you to have 10% to 20% of equity remaining after loan. If your home is worth $ 300,000 and you owed $ 270,000, you only have 10% equity and you will not qualify.
But as long as you have not maxed out your debt-to-speech and your credit is good, you can still get a loan without collateral personal loans. Not only that, you can get a rate that is comparable home equity loan or HELOC prices.
For example, LightStream, a division of SunTrust Bank, offers an unsecured personal home loan improvement with prices as low as 4.99% for 24 and 36 months for $ 10,000 to $ 100,00
5. You’ll pay less in fees
Personal loans usually have call origination fees, but they do not have application fees, assessments and fees, annual fees, points, title search and department insurance fees, mortgage preparation and fees for notification, or early repayment fees like home equity loans and HELOCs usually do.
Many home equity lenders refrain from any or all of these fees. However, if you pay off your loan within the first 2 or 3 years, the lender will introduce an early repayment fee.Sometimes it’s only a few hundred dollars, but other times it includes all fees originally from, and these can total thousands of dollars.
Under normal circumstances, you probably will not pay off your loan early, but if you move or refinancing is an option, a personal loan can save you a lot in fees.