Home Improvement Loans with No Equity
Turning your new house into a home is one of the most exciting aspects of being a homeowner. While small fixes are usually affordable, that’s often not the case when it comes to major improvements. In many instances, homeowners turn to the equity in their home to make major upgrades. However, if you put little down on your house or saw a significant decline in the price of your home over the past few years, that may not be a possibility. Fortunately, you’re not at a total loss. Home improvement loans with no equity make upgrades possible in the event you have little to no equity to utilize.
If you want to join the increasing numbers of Americans who are upgrading their homes instead of moving, consider the following when looking at a home improvement loan with no equity.
Is it a Good Idea to Get Home Improvement Loans with No Equity?
Making major improvements to your home can be a great way to either increase your enjoyment of your house or to increase the value of your property for a potential sale. Before you consider making improvements, it’s important to determine whether or not it will add value to the house.
Some improvements, like updating your kitchen or upgrading the master bathroom typically add value. Other upgrades, like a pool or going beyond what is typical for your neighborhood, tend to not add value to the house. Therefore, it may not be worth the investment.
Regardless of the upgrade, there are numerous things you must consider before looking at home improvement loans with no equity – as it increases your indebtedness.
Reasons to Consider Home Improvement Loans with No Equity
- Taking out a home improvement loan with no equity allows you to upgrade your home for either personal enjoyment or to achieve an increase in the value of the house.
- Thanks to the interest rate climate or your creditworthiness, you may be able to get a lower rate. However, rates are higher than with mortgages, so you must keep that in mind.
- You may not need to put up collateral, depending on the amount of the loan.
- Compared to a second mortgage, you might be able to get the loan quicker; you will also likely not incur the same fees as with a second mortgage.
- There are typically no prepayment penalties on these types of loans.
To be fair, not everything is good with home improvement loans with no equity.
Drawbacks to Keep in Mind
- If your house is used as collateral, it’s possible to have your home foreclosed on if you can’t make payments.
- You add an additional payment each month to your budget.
- Unlike standard home equity loans, you are unable to deduct interest on taxes.
- You may only be continuing the cycle of poor financial choices by taking on more indebtedness.
It’s also important to note that home improvement loans with no equity typically require good credit. Each situation is unique. So, it’s important to consider your particular situation before taking out home improvement loans with no equity.
Title 1 Home Improvement Loans
Home improvement loans with no equity have become more common in today’s environment. So much so that the Federal Housing Administration (FHA) supports and approves all lenders for what they call FHA Title 1 Home Improvement Loans. While the FHA does not issue the loan itself, it does provide peace of mind when considering this type of home improvement loan.
Here’s what to know about Title 1 Home Improvement Loans:
- You can get a loan of up to $25,000 to improve your home. Any loan over $7,500 requires collateral – in the form of the mortgage or deed of the trust on the property.
- You can get a loan term of up to 20 years. If you are improving a manufactured home, terms are shorter.
- There are no closing costs with a Title 1 Home Improvement Loan.
- The loan is attached to you, not the house. When you sell the house, you can either choose to pay it off or continue paying on the loan.
- You may only use the Title 1 Home Improvement Loan for alterations, repairs, and site improvements, according to HUD. This means you cannot use funds to install a pool or other luxury item.
- You may face higher rates when there is no collateral on the loan.
Applying for home improvement loans with no equity is fairly straightforward. As the FHA approves all lenders, you simply apply directly to those specific lenders. Make sure to compare offers from a variety of FHA-approved lenders to find the best rate possible on the loan.
Other Home Improvement Loans with No Equity
A Title 1 Home Improvement Loan is not the only option if you have little to no equity in your house. There are several other options to consider, such as:
- An unsecured personal loan. You can use unsecured personal loans for virtually any purpose – including improving your home. You may face higher rates, but may also encounter fewer requirements. If you have great credit, an unsecured personal loan may be a good alternative.
- A credit card. This would only be advisable if you can get a low-interest rate credit card for 12-18 months. You would want to make sure that you can pay off the card prior to an increase in interest rates.
- Contractor loans. Some specialized contractors offer financing. Be careful with such loans as they typically have higher interest rates. Not to mention potential problems if you’re not satisfied with the work.
- Take a 401(k) loan. 401(k) loans offer flexibility and access to money quickly. You are also borrowing against your retirement. So, proceed with caution with this option. Especially if you don’t believe you will be able to repay the loan promptly.
There are many options to consider when you want to improve your home that has little equity. All options are not created equal, so make sure to seriously consider your needs before making a decision.
Home improvement loans with no equity provide the opportunity to improve your home when you’re unable to use the house to fund those changes. When done wisely they can provide a great return. Just make sure to do your due diligence prior to taking action to best position yourself.