The Difference Between Home Improvement Loans

One financing option for home improvements is obtaining a home equity loan. A home equity loan is a type of loan where the lender will take a new mortgage on your property to secure payment of the loan. The interest rates on home equity loans are typically lower than unsecured loans because of they are secured by the equity in your home. You may also be able to deduct interest on a home equity loan in certain circumstances. You generally need equity in your home -- some value left after payment of all liens -- in order to qualify for a home equity loan.

A home equity line of credit -- often called a HELOC -- is another option. Like a home equity loan, the lender will take a security interest in your property to make sure it gets paid. However, while a home equity loan is for a fixed amount given to you at closing, a home equity line is more flexible. You'll be granted a line of credit to draw upon up to a certain limit. You'll only take what you need, when you need it. You may be able to deduct interest on a HELOC.

Another option is to refinance your mortgage. If interests rates are lower than your current mortgage, it may make sense to refinance it and get cash at closing for your home improvements. This option keeps the number of mortgages or liens on your property the same, but the value of the new lien replacing the old lien may increase depending on how much equity you "cash out" for renovations. Like any other type of mortgage loan, you may be able to deduct interest.

Taking out a personal loan is another option. The biggest advantage to a personal loan is that it is usually unsecured -- you don't have to give a mortgage to secure payment. However, this also means that the interest rates on personal loans are higher because the lender is taking more risk. Additionally, the interest on personal loans is generally not deductible. You'll have to weigh the advantages of having an unsecured loan against the additional interest expense and tax disadvantages.