Upgrade Loans: Is Taking Out a Loan for Home Improvements a Good Idea?

Upgrade loans for home improvement

Over 50 percent of U.S. homes this year need repairs or renovations. But for most homeowners, paying for repairs out of pocket isn’t realistic. That’s where upgrade loans come in.

With an upgrade loan, you can secure the funds you need to make improvements to your home.

As with any kind of loan, there are benefits to getting an upgrade loan, but you should know what you’re getting into. An upgrade loan might not be the best choice for everyone or every situation.

Should you get an upgrade loan to make improvements to your home? In this comprehensive guide, we’ll give you everything you need to answer that question — keep reading to learn more!

What Are Upgrade Loans?

An upgrade loan is any kind of loan that you use to make upgrades or improvements to your home.

Many upgrade loans are unsecured personal loans, but they also come in many different forms — more on that below. Basically, they all give you a way to finance home improvements, which can get very expensive.

Some home improvements are important for improving your quality of life, while others can raise the value of your home. Upgrading your home is a great investment in the future, and upgrade loans mean you won’t have to put off those improvements.

Types of Home Improvement Loans

Now, let’s take a look at the ways you can secure the funds to improve your home.

1. Home Equity Loan

If you have equity in your home, you can borrow against it to help fund your repairs.

Home equity refers to the portion of your home that you’ve officially paid for to date. Borrowing against this amount depends on how much equity you have. If you don’t have a lot of equity, you might not be able to use it.

But if you’ve paid off a significant portion of your home, this can offer you a large pool of funds to pull from.

With this kind of loan, your home acts as collateral, which can help you get a lower interest rate. However, this also creates a type of risk, since you could lose your home if you end up in a situation where you can’t pay off the loan.

If you’re in a stable place where paying off the loan will be easy, though, a home equity loan is a great way to finance improvements.

2. Personal Upgrade Loan

Personal loans tend to come in smaller amounts than home equity loans, but they do work well for small projects.

Since there’s no collateral with a personal loan, you won’t need to risk losing anything like your home or car. However, unsecured personal loans often come with higher interest rates because of the lack of collateral.

Also, the repayment term for a personal loan tends to be shorter. Prepare to make higher payments for a shorter period of time until the loan gets paid off.

The terms of your loan also depend on factors like your credit score.

3. Refinancing

You can also refinance your existing mortgage to get a little more funding for home improvement projects.

With refinancing, you replace your existing home loan with a new one that has new terms. Those new terms can include some extra funding for your upgrades.

However, you’ll have to get ready to spend more time paying off your new, larger loan.

Are Upgrade Loans a Good Idea?

Now, the most pressing question: is it wise to use one of these loan options to upgrade your home?

The answer largely depends on what kind of loan terms you can secure, as well as the type of improvements you’re hoping to make.

For example, if you can get a loan with a low interest rate, and use it for an improvement that will greatly increase your home’s value, it’s probably worth it.

But taking out a high-interest loan for a project that ultimately won’t add much to your home will make your financial situation more difficult, with very little payoff.

Upgrade loans are also wise if you need to fix a problem that will become more costly over time.

For example, you might need a loan to fix a leaking pipe in your basement. While the loan terms may not be ideal, they’re probably better than the cost of water damage over time.

Go over your budget carefully and make sure you’ll be able to keep up with the needed loan payments. Never take out a loan that you’ll struggle to pay back, especially if there’s collateral on the line, like your house.

But if the terms are manageable and the loan is needed, go ahead with it.

Can You Get Home Improvement Loans with Bad Credit?

For people with bad credit, upgrade loans may sound especially risky. However, even if you have bad credit you might still do well with an upgrade loan.

First, there might be some government loan programs that will help you get the funding you need. For example, you can get an FHA Title I loan for certain permanent upgrades.

Next, you can look for private lenders who will work with people who have bad credit. According to the loan experts at Bonsai Finance, some loan approval processes look just at your ability to repay, so your credit score won’t factor in.

Between the government and private lenders, almost anyone can find the funds they need for the upgrades they want.

How Will You Use Your Upgrade Loan?

It’s a good idea to have a plan for your upgrade loans before you apply. This helps makes sure you get the amount of funding you really need. But that plan will vary from home to home.

Some homes will get a major boost from new hardwood floors, while others could use a trendy kitchen remodel. You can also save some money by using the funds to invest in tools for DIY projects.

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