Mariner Finance Blog

What’s the Difference Between a Home Equity Loan and a Home Improvement Loan?

couple review home improvement loan options

Whether it’s a much-needed repair or a longed-for renovation, home improvements cost money. Two common ways to finance those updates are through a home equity loan and/or a personal home improvement loan. Which one might be right for you? Before you decide, it is important to consider how they compare.

Home Equity Loans

Equity is the difference between the value of your home and how much you still owe on your mortgage. For example, if your home has a current appraised value of $400,000 and you still owe $240,000, your equity would be $160,000. The more equity you have in your home, the larger the loan you may be approved for.

Financial institutions consider equity—among other criteria—when deciding how much they are willing to lend to you. The rules from individual lenders will vary, but you may be able to borrow up to 85 percent of the equity you have on your property. Home equity loan repayment terms can also vary, ranging from 5 to 30 years. Usually offered with a fixed interest rate, home equity loans are available at a range of financial institutions and the application process is similar to applying for a mortgage.

Personal Loan for Home Improvement

A personal home improvement loan does not rely on the equity you have in your home. However, like home equity loans, they generally come with a fixed interest rate, and you can apply at a bank, credit union, finance company, or online lender. Lenders usually offer home improvement loans for up to $100,000, and repayment terms range from 1 to 12 years. Your interest rate is based on your creditworthiness as determined by several factors such as your income, debt-to-income ratio, and your credit score.

Some differences between a home equity loan and personal home improvement loan include:

1) Application and Loan Fees

Home equity loans usually require closing costs that can range from 2% to 5% of the loan amount. These might include origination fees and fees for an appraisal, title search, credit report, and loan recording.

Personal loans may also have origination fees but the fees may not have as many overall closing costs. For example, there’s no reason to run a title search on your property because you are not pledging the property as collateral for t the loan.

2) Interest Rates

Home equity loans are a type of secured loan because you use your home as collateral. Because there is generally less risk with secured loans for the lender (they can take your house if you don’t repay the loan), interest rates tend to be lower compared to a personal home improvement loan. Keep in mind, however, that your rate may vary depending on your credit score and how the lender determines your creditworthiness.

Conversely, Personal home improvement loans are likely unsecured. Because the lender’s risk is considered greater than with a secured loan, you are likely to pay a higher interest rate than you would with a home equity loan.

In sum, interest rates on both types of loans can vary. While your interest for a home equity loan may be tax deductible, interest on a personal loan is not.

3) Approval Time

The process for applying for a home equity loan is similar to that of a mortgage loan application and can take from two weeks to two months for approval. A personal loan for home improvement, on the other hand, may be approved in a matter of a few business days since it only requires documentation to confirm your identity and income.

Whatever type of loan you decide to pursue, consider lenders who care about your individual goals and circumstances throughout the process. The Mariner Finance loan representatives are passionate, attentive, and responsive to your needs. Find out how a personal loan might finance your home improvement.

The information provided in this article does not constitute financial advice and is provided for educational purposes only without any express or implied warranty of any kind. This article is not intended as legal, tax, investment, or any other advice, and Mariner Finance does not offer credit repair services. Consider talking with an appropriate qualified professional for specific advice. Blog posts are for informational purposes only.