Secured Home Improvement Loans: Low Rates Through Collateral

A good strategy for keeping the rates on home improvement loans low is to use collateral, typically in the form of your home. This is called a secured loan and is also referred to as a second mortgage.  This loan type requires you place your home on the line. The loan amount is based on the equity in the home. Unsecured do not require collateral. To determine which is best for you, consider the advantages of each.

When to Seek a Home Improvement Loan

There are two main reasons you should seek a home improvement loan:  to increase the resale value of your home or to increase your enjoyment of the home while you are there. Typically, the resale value is most common. If you purchased an older home or a "fixer-upper," the improvements you make will generally increase its value. Consult a real estate expert before making improvements, so you do not out price the maximum value for your home in its given neighborhood. On the other hand, when making improvements for your personal enjoyment, you have more flexibility. It's a good idea to make sure you will live in the property long enough for the investment to pay off.  Swimming pools and hot tubs are often considered poor resale investments because you will typically not earn your money back since the expense to build or buy are high.

Advantages of Unsecured Home Improvement Loans

Without collateral, the lender assumes the risk of the loan and they will charge you more in costs accordingly.  Interest rates on unsecured loans tend to be much higher than those with secured loan products. You will also be required to have a longer credit history and an outstanding credit score. This type of loan works best for the homeowner that does not have much equity, but has a strong financial history. 

Advantages of Secured Home Improvement Loans

Secured home improvement loans allow you to use your home as the collateral for the financing. With this type of loan, the borrower is assuming the risk, as a result, the interest rate tends to be lower. Secured home improvement loans allow a more lax credit history because the collateral is typically greater value than the loan itself. This loan works best for a person who has a lot of equity in their current home but can only show a brief credit and financial picture or bad credit.  Although your payments can be low, you can lose your home if you default on the mortgage payments. Secured loans are only a good option if you are financially stable.

Which is Best

Secured loans will save you moneyover time. They are only best, though, if you have the equity to put down and have a low chance of default. Make sure you have a back up plan with a secured loan because your home can be foreclosed on if you do not make payments.