Home Equity Loans vs Home Improvement Loans

Published June 7, 2019 

By Jordan Ottaway

Whether you’re planning to sell your home or just want to make improvements, deciding how you’re going to fund the costs can seem like a daunting task. If you don’t have the right amount in your savings, looking into a home equity loan or home improvement loan is a good first step. 

Now you might have some questions: What is the difference between the two and which one is right for me?  

Home Equity Loan 

The equity in your home increases as you pay down the balance on your mortgage and as your home’s value appreciates over time. A home equity loan works by you borrowing against your home’s equity. The basic type of home equity loan is a second mortgage taken out in addition to the existing loan.

You will get the money needed as a lump sum to spend on your improvement projects as needed. The general requirements for approval are similar to those of your first mortgage. You'll need a good credit score, enough income to support the new payments, and a low debt-to-income ratio.

Home Improvement Loan 

Home improvement loans are offered by some lenders for the specific purpose of making home improvements, such as remodeling, re-insulating your home, adding a pool, etc. These loans don't require collateral, so the equity in your home isn't taken into consideration. Generally, the lender will require you to include individual steps to be completed during the project, along with applicable costs to each stage.

Dispersing funds will depend on the complexity of your project. Smaller home improvement projects may benefit from a simple four step schedule while bigger projects may require five to seven disbursements as specific parts of your project are completed and inspected.

Choose which one is right for you 

Deciding between a home equity loan and a home improvement loan ultimately depends on your financial situation, what you want to accomplish, and plans for the future. A home equity loan can serve multiple purposes in addition to making home improvements. You can use the money to pay off high-interest debt, for example, for college tuition or for an emergency fund. However, if you need to borrow more money than you have in equity, the improvement loan would be a better option.

You can always reach out to our Mortgage Team if you have any questions.