If your house needs a little TLC, but you don’t have the cash to give it what it needs, then a loan could be a good route to take. After all, you could save up and make the repairs over time, but houses really can’t be ignored for long.
Put off repairs for a year or two and a bit of peeling flashing around your chimney can suddenly spiral into inner structural damage and mold to boot.
Many long-term homeowners will agree that houses are really much like babies who need constant pampering before they’ll let you sleep soundly through the night.
Whatever your home renovation needs must be, find out about two types of loans that can help you get the right financing. We’ll talk about the differences between home equity loans and home improvement loans, plus point you in the right direction of the best lenders out there.
Table of Contents
- 1 What’s the difference between a home equity loan and a home improvement loan?
- 2 What are the best home improvement loans?
- 3 What are the best home equity loans?
What’s the difference between a home equity loan and a home improvement loan?
Understand the nuances before you choose which one is best for you.
Home Equity Loans
Home equity is the amount of the house that you own. If your initial home loan was for $200,000 and it’s now down to $180,000, then you have $20,000 in home equity built up.
Another way to determine your home equity?
If that same house is now assessed to be worth more than $200,000, then, of course, your equity will be the tax assessment minus the amount you still owe on the loan.
Home equity loans use the equity you’ve built up as collateral for a new loan. So if for some reason you stopped making payments on the new loan, the lender would then possess your equity.
Often times home equity loans are taken out to pay for big expenses, such as medical bills, college education, or, you guessed it, home repairs.
If you go this route, know that you can typically only borrow up to 85% of the equity you have in your house. So if you have $20,000 in equity, then the maximum loan you could take out would be $17,000.
You get the money all at once in a one-time installment, so the loan amount is a defined, fixed amount. This is different from a home equity line of credit (or HELOC), which acts much like a credit card in that it provides borrowers with a revolving line of credit.
Home equity loan terms vary depending on the lender. Some banks, such as Bank of America, have a three-year loan term, whereas most banks hover around five years. In some extreme circumstances, however, loan terms can last as long as thirty years (yikes!).
Home Improvement Loans
Unlike a home equity loan, a home improvement loan does not require the use of anything to secure the loan. That means if there is no collateral the lender takes on more of a risk by giving out the loan.
How does the bank compensate for taking on a larger risk?
By charging higher rates to the borrower, of course. Home improvement loan interest rates start at 5.25%, but depending on the borrower’s credit and financial situation, this number can be higher.
A home improvement loan is really a type of personal loan that the borrower chooses to use towards his or her house. The loan terms tend to be much shorter, usually only lasting a few years.
This means, depending on how much you take out, the monthly payments are usually higher than a home equity loan, but you could pay less in the long run because of the shorter loan term.
If you don’t pay on your loan, then your lender will send your account to a collections agency, but you can rest easy knowing they don’t have the right to take your house.
For both types of loans, you start making monthly payments on the next billing cycle. Interest starts to accrue, but the rate you’re given stays the say throughout the life of the loan as both are fixed-rate loans.
That’s why it’s always a good idea to shop around because whatever rate you agree to in the beginning will be the rate you have throughout the loan term.
What are the best home improvement loans?
We’ve combed through the plethora of home improvement loans out there and come up with our top lenders for home improvement loans as well.
On our short list: LendKey, Avant, LightStream, and Wells Fargo.
LendKey is interesting because it actually gives out home improvement loans to both contractors and homeowners. Beyond that, they offer some great perks for both types of borrowers.
Why they’re number one:
- Long repayment options (up to 15 years) to minimize monthly payments.
- Flexible eligibility requirements for general home improvements.
- Loan funds are paid directly to the contractor.
- No hidden fees.
- All loans are currently unsecured with fixed APRs.
- Matches borrowers with lenders across the country to find you the best loan terms possible.
LendKey is really changing the way home improvement loans work.
Why they’re so close to the top:
- You don’t need a perfect credit score to get a decent home improvement loan. In fact, people with low credit scores are often able to get loans with Avant.
- They often review applications the same day they’re received.
- Great customer service available seven days a week.
- Access to funds is provided very quickly.
- The funds don’t have to be used for home improvement.
Why they didn’t quite reach gold:
- Not available in Colorado, Iowa, and West Virginia.
- They’re a new startup company, so they don’t have a lot of history yet.
- They have a loan maximum of $35,000, which is pretty low.
- Their APRs are a little higher than most other lenders, but that’s because they do try to cater to people with lower credit scores.
LightStream is a division of SunTrust Bank and has a lot going for it. For starters, other than the interest they charge on loans, there are no fees involved with taking a loan out through them.
Another great thing is that they offer high loans of $100,000 to borrowers who qualify. That’s enough to build a high-end addition to just about any home! If you have a long list of improvements you need to do to your home, then this is your go-to lender.
How they made the list:
- Fixed APR rates as low as 4.99%.
- You can get loan terms as long as seven years to lower monthly payments.
- You can receive funds in as little as a day after applying.
- As long as it’s related to your project, you can use your loan for anything you wish.
- No fees, and loan amounts can be as high as $100,000.
- Very easy online application process.
- Monday through Saturday customer service.
Where they need to improve:
- They have a loan minimum of $5,000, which is higher than most lenders.
- You can’t use funds for anything unrelated to your house.
- They only work with borrowers who have good credit. While they give a definition of good credit, they don’t give a concrete number.
Why they rank in the top:
- 8,700 branches across the United States means Wells Fargo is an easy company to go in and speak with a real, live human being. That’s always a plus in this day and age.
- No origination fees for loans up $100,000.
- Rates are pretty decent for an unsecured loan, and can be as low as 6.78%.
- You can have a loan term of one to five years.
What’s holding them back:
- The bank has done some pretty shady things as a company lately, one of which is signing up account holders for credit cards without their consent.
- They’ve also got some pretty sub-standard customer service reviews lately. You’ve got to take these things with a grain of salt because people are never as much in a hurry to leave a review as they are when they’ve had a bad experience.
- As of right now, you can’t sign up online for a home improvement loan unless you’re already an account holder with Wells Fargo. There’s really no good reason for them to be doing this, especially with it being the golden age of digital banking.
What are the best home equity loans?
There are a lot of home equity loans out there, and obviously, some are better than others for consumers. We’ve thinned the herd to what we consider to be the top three in the industry: LendingTree, Bank of America, and US Bank.
Now find out why.
LendingTree is another matching service that pairs borrowers with multiple lenders. Fill out a single application with them, and you are instantly connected with multiple lenders all vying for your business.
That competition means you can instantly see who is going to give you the best service. You don’t have to scour the internet. That’s already been done. You don’t have to research the pros and cons of each loan and lender — that, too, has already been done.
Here’s what else we like about LendingTree.
Why it’s number one:
- Great APR quotes.
- Their customer service is like having an infinitely patient, well educated older brother or sister guiding you to make good decisions.
- Huge time saver. One application and you’re done.
- Everything is disclosed in plain view, and easy to understand.
- Their website is second to none.
What they can do to stay at the top:
- The phone calls can be a bit much from banks trying to get your business. A do not call option on your account would be great.
Bank of America
What they’re doing right:
- With over 5,000 branches (and counting) across the United States, finding a knowledgeable person to talk to is a breeze.
- Rather talk online? B of A’s online chat service is actually handled by real live people — not algorithms spitting out planned responses after noticing a few keywords.
- Low APR quotes. 2.99% for the first 12 months — and it’s only a three-year loan.
- That’s right: a three-year loan term. (Most are five!) While your monthly payment will be higher, you’ll save more money over time with a shorter loan term.
- They clearly outline and disclose all fees and terms of the loan. In fact, it’s one of the most transparent companies you’ll find anywhere.
Where they can improve:
- Despite their availability, customers across the board only give them an average rating on customer service.
- Their rate generator will not allow you to change the repayment term, which is unusual in the industry.
Where they shine:
- Lower rates than Bank of America (fixed can be as low as 2.5%).
- Strong customer service reviews across the board, and the option to chat online.
- Just like Bank of America, they are very transparent about every fee and term that goes along with the loan. It’s right there right in the open.
- No early closing fees.
Where they need some elbow grease:
- Website is a little barren. If you’re new to the process, don’t expect US Bank to take the time to help you understand.