Your family is growing and your home doesn’t have enough rooms? Want to keep up with the trend by updating your kitchen? Need space to place your new bathtub? Your home may need constant changes (minor or major) as per your changing lifestyle. Does that mean every time any such thing happens, you will have to pack your bags and move to a new home? Personal loans can give you a sense of financial relief if you consider improving your current home rather than selling it off to buy or rent another place. Buying a new place is an expensive option and renting one may also prove to be expensive.
Many of us rely on a home equity loan or a home improvement loan when it comes to upscaling our property. Both are loans, so, is there a difference between them? YES. They work differently.
Let us find out how.
What is a home equity loan?
A home equity loan is also called as the second mortgage. You can borrow a lump sum amount against the “equity” of your home. The way your first mortgage is secured against your home, a home equity loan is also secured against your home. For this reason, it is called as the second mortgage.
Deduct the current market value of your home from the amount that owes on your mortgage – the result is the equity.
Suppose at the time of purchasing the house, its cost was £500,000 and due to development in your locality, its current market value has increased to £550,000. You are regular with your mortgage payments and £270,000 is left unpaid. So, the equity available will be £280,000.
What is a home improvement loan?
A home improvement loan is a personal loan that you may borrow without securing it against your home. That means if you default at the loan, your home will not be at the risk of repossession by the lender. You can borrow an amount as low as £1,000 and as high as £35,000. Different lenders may offer you a different borrowing range depending on your credit profile.
Is there a difference between a home equity loan and a home improvement loan?
One major difference between both of these products is – a home equity loan is a secured loan while a home improvement loan is an unsecured loan.
|Home Equity Loan||Home Improvement Loan|
|Secured against your home||Unsecured personal loan|
|The repayment period may go up to 30 years||Maximum repayment period of 7 years|
|Your home is at risk if you default||Your credit score is at risk if you default|
|You will pay less interest overall||The interest that you pay may be high|
Are home equity loans a good idea for home improvement?
The answer to this question is – it depends. If you are considering a major home improvement and you are sure that you can afford all the repayments on time and in full – then a home equity loan will be an attractive financing option for you.
The only thing you have to take care of is – repayments. If you default at the repayments, you are putting your home at risk. Also, note that every time you take out money of your equity, the time taken to pay off your debt will also increase.
If you are eyeing on minor home improvements or you are not willing to put your home at risk – you can rely on a home improvement loan. As the loan is unsecured, your property will not be at stake even if you fall behind on the repayments.
Does a home equity loan affect your credit score?
Yes. A home equity loan can have an impact on your credit score. Your every financial move is recorded on your credit report and using these parameters, your credit score is calculated. So, if you are regular with your repayments – your credit score will improve. Similarly, if you miss a repayment or stop making the payments altogether, your credit score will go down.
What are the similarities in a home equity loan and home improvement loan?
After your application is approved, either for a home equity loan or a home improvement loan – they function in the same way. You will receive the loan amount in your bank account, and you have to pay back the lender every month. Interest rate is applied to both the financing options. And both of them are a fixed interest rate loan. That means the interest rate will remain the same throughout the loan duration. There will be no change in the interest that you are supposed to pay till the loan completion period.
Can I take a home equity loan if I have paid off my house already?
Yes. Even if you have paid off your house, you can still take out a home equity loan. If you are considering to use the amount for consolidating debts, making home improvements, – a home equity loan is a good option. Rather than using a credit card for making home improvements, you should use a home equity loan as the overall rate of interest will be low comparatively.
The amount that you can borrow depends on a range of factors – debt-to-income ratio, credit history, and the loan duration you have applied for.
Before applying for any form of credit, it is better to check your credit report first. If you have a low score, the interest rate for the loan offers you may receive will be high. Scan your report and if you find any errors, get it rectified from any of the three Credit Reference Agencies (CRAs). And most importantly, compare multiple offers before settling down for one option.
LoanTube offers you a “free of cost” platform to compare multiple loan offers from different lenders on a real-time basis. That means our lenders provide a rate-lock guarantee after assessing your loan application and credit report.