Home renovation can be an expensive affair, with a complete renovation capable of costing well over $300,000. Minor renovations can set you back about $20,000. Generally, a big chunk of these expenses goes to labor and sourcing the required materials.
So, how do homeowners pay for these renovations? The fact is producing cash out of pocket for a home remodel can be a tough affair for most Australian homeowners.
That’s where home renovation loans come in. But exactly what is a home renovation loan? What are the best home renovation loans in the country? How can you get them?
If you’re asking these questions, you’ve come to the right place. Read on to learn more.
What Is a Home Renovation Loan?
Home renovation loans are loans that provide the funds you need to make improvements in your home. Homeowners have a variety of choices when it comes to these types of loans. A renovation loan can help finance anything from minor home repairs to an extension for your growing family.
What Is the Best Loan for Home Renovations?
Homeowners at a loss on how to pay for home renovations are often pleasantly surprised to learn there are loans to help out. In this section, we take a closer look at five of these loans.
Home Equity Loan (HEL)
Home Equity Loans (HELs) are loans that allow homeowners to borrow against the equity they’ve built up in their homes. The lender calculates your home’s equity by assessing its value minus the balance due on your mortgage.
Note that home equity loans don’t pay off the existing mortgage. That means that you’ll be required to keep making the monthly payments on your mortgage while also paying off your home equity loan.
Home equity loans are a good solution when you have considerable equity built up in your home. Generally, homeowners who opt for these types of loans are planning a big, one-time project.
A home equity loan uses your home as collateral, just like your mortgage. Thus, lenders can offer you lower interest rates since the loan is already secured. The loan term can be as long as 30 years, which gives you plenty of time to pay back the loan.
Of course, the main setback of a HEL is that you’ll be making a second monthly payment if your first one isn’t already paid off.
Home Equity Line of Credit (HELOC)
People mulling over how to get a home renovation loan may also consider HELOCs. These types of loans are similar to HEL but work more like credit cards. That means you can borrow from a HELOC up to your pre-approved limit and pay it back before borrowing from it again.
Unlike HELs, the interest rates in HELOCs are adjustable. Simply put, these interest rates can rise and fall over the course of a HELOC’s loan term. However, the interest charged is only due to the amount you’ve borrowed.
Getting a HELOC is a good solution if you’re making a few low-cost renovations or wish to fund a longer-term project on an ongoing basis. Generally, lenders determine your HELOC limit based on your income, credit score, and home value. You can use a home renovation loan calculator to determine how much you may be able to get.
For those without lots of home equity to borrow, unsecured personal loans can be a suitable solution for financing home improvements. Since these loans are unsecured, you won’t be using your home as collateral. These loans are typically faster to obtain compared to HELs and HELOCs.
Generally, a personal loan attracts a higher interest rate than a HEL or HELOC. However, if you have a healthy credit score, lenders may be willing to offer you an affordable rate.
Generally, personal loans have a much shorter payback period. Expect the term to range anywhere between one and five years, though some can be longer.
You can also opt to finance some of your home renovation projects with your credit card. This is arguably the simplest and quickest way to pay for a home remodel as it doesn’t require you to fill out a loan application form.
The main drawback of using a credit card for a home renovation project is that it requires you to get approved for a high limit. That’s because, as we pointed out earlier, home renovations can cost tens of thousands of dollars. The other option is to use more than one credit card.
Besides, the interest rates you’ll be required to pay when using a credit card are some of the highest around. Most credit cards require you to pay back the balance within a shorter period compared to other loans.
If you must use your credit card, make sure it’s for an emergency and that the renovation is minor.
In construction loans, lenders consider the final value of your home after the remodel before approving the loan. Also, borrowers aren’t allowed the total loan amount upfront. Instead, the loan is dripped out to your account over a set time frame.
For homeowners looking for a lump sum for their home renovation, a construction loan may not be the best solution.
Choose the Best Home Renovation Loans for Your Project
The cost of renovating a home can seem intimidating for many homeowners, but there’s always a solution. Thanks to innovative financing options offered by lenders today, Australian homeowners have access to the best home renovation loans for their needs.
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