Pros & Cons of Home Improvement Loans

A secured home improvement loan is one that uses your house as collateral. This is often called a home equity loan, or a second mortgage. The benefits of this type of loan are that you can generally get a higher loan amount at a fixed interest rate, and have 10 to 15 years to pay it off. Another great benefit of this type of loan, when used for home improvements, is that the interest is often tax-deductible. The major drawback is that if you default on payment, the lender can foreclose on your home. Whether you qualify for this type of loan, how much you qualify for, and the interest rate all depend on the age, condition, location and size of the property, as well as on your credit rating. Also, the terms of your loan might prevent you from being able to rent out your home.

It's also possible to get an unsecured loan for home improvements. This type of loan uses no collateral, which makes it a bigger risk for the lender, but less risky for the borrower. Unsecured loan amounts tend to be smaller, with higher interest rates, and they typically must be paid back within 10 years or less. How high of an interest rate, and how much of a loan you qualify for, will depend largely on your credit score. Also, interest on unsecured loans isn't tax-deductible.

Home improvement loans are beneficial for making repairs and upgrades that will increase the value of your property. Strategic home improvements can increase a property's value so much that the loan pays for itself. A loan also allows you to jump on needed repairs instead of having to postpone them until you can save up enough money, which in turn can cause the damage to worsen and become more costly.

Whether a home improvement loan will be beneficial to your home's value depends largely on the economy. During a poor or fluctuating economy, interest rates tend to be higher, which means that the loan could end up costing more in the long run than any increase in property value your home improvements bring about. Also, shoddy work on the part of any contractors you hire for the improvements can end up causing your home to lose value; so it's important to research and strategize the best way to spend your loan in order to minimize risk.