Maybe you’ve spent too much time watching Sanjeev Kapoor’s Khana Khajana and now have visions of turning your kitchen into a chef’s paradise. Or perhaps your master bathroom is just one shower away from disaster.
If yes, then you’re not alone. From last few years, a lot of NBFCs like ICICI, AXIS, INDIABULLS, DHFL, LIC HOUSING etc. have taken up the initiatives for home improvement industry and thus introduced many products for same. For many people, that means borrowing money to pay for those home improvements became much easier.
All in all, the question comes at which home improvement loan is right for you? Many homeowners look to tap the equity in their homes. But home equity loans or home equity lines of credit may not be possible or practical for some borrowers. In that case, consider using a personal loan.
While you can use a personal for a variety of reasons, there are a few reasons why a personal loan can have advantages over home equity loans when it comes to a renovation loan specifically.
The application process for a personal loan is usually pretty straightforward. Your own financial situation—e.g., your credit history and earning power—is often the deciding factor for whether or not your loan will get approval or not, for how much and at what interest rate. Some personal loan providers even boast no processing fees.
Home equity loans, on the other hand, are akin to applying for a mortgage (in fact, home equity loans are sometimes called second mortgages). How much you can borrow depends on several factors, including the value of your home. As you can only borrow against the equity you already have (i.e. the difference between your home’s value and your mortgage), you may have to arrange – and pay for – a home appraisal.
With a home equity loan, you can only borrow against the equity you have – which, as a new homeowner, which usually is not much. You haven’t had enough time to chip away at your mortgage and the market hasn’t yet elevated your home’s price. A personal loan lets you start home improvements regardless of how much equity you have.
With a home equity loan, you use your home as collateral, which means an inability to repay could result in your home going into foreclosure. While failing to pay your personal loan carries its own risks (like ruining your credit), it’s not tied to the roof over your head. Also going for a full fledged Home Loan like ICICI bank home loan is not a right option.
So how do you decide?
Personal loans may not be right for every borrower looking for a home loan. For example, if you have significant equity in your home and are looking to borrow a large amount, you might be able to save money with lower interest rates on a home equity loan. You can also use Loan EMI Calculators for giving you a brief Idea. Also, interest payments on home equity loans and lines of credit can be tax deductible under certain circumstances – that’s not the case with personal loans.
On the other hand, personal loans make more sense for:
- Recent homebuyers
- Smaller home improvement loans (e.g., bathroom or kitchen as opposed to full remodel)
- Borrowers in lower home value markets (if your home value has barely budged since you moved in, you may not have much equity to draw on for a home equity loan)
- Those who value ease and speed
- Borrowers with great credit and cash flow
While home loans and lines of credit are a good source of home improvement money if you’ve built up equity in your home, a personal loan may be a better alternative if you’re a new homeowner and need to take care of a few updates to make your new home just right.