Personal loans vs. HELOCs when you’re poised to sell
Key takeaways
- HELOCs tie up equity you might need to make a down payment on a new home.
- Personal loans can be funded quickly since lenders don’t vet your home’s value for approval.
- Closing costs may be significantly lower than HELOCs, with many excellent credit lenders offering no-fee options.
With home prices at record highs and mortgage rates dropping ever so slightly, homeowners may be ready to get serious about selling their homes. If your home needs some sprucing up ahead of the spring buying season, you may be tempted to take out a home equity line of credit (HELOC) or home equity loan.
Doing so, however, could end up opening a can of worms. It can make your home hard to sell, your new home more expensive to buy or put a serious dent in your profit at the closing table. There is an accessible alternative that can bypass many of these issues — a personal loan for home improvement.
Five reasons a personal loan is better for home improvements when you plan to sell
1. You’ll protect your resale profit
Buying a home is more expensive than ever. While it’s not likely that prices are coming down anytime soon, there is one thing you can do to lower the payment on a new home mortgage: make a bigger down payment.
Tying up your home equity with a HELOC or home equity loan guarantees you’ll net less at the closing table. Because both products are secured by your home, they have to be paid off with your sale proceeds.
Personal loans for home improvement are unsecured. Your home’s equity is untouched, which means you max out your profit for the largest possible down payment on your new home.
2. You’ll avoid expensive mortgage costs
Closing costs on home equity financing can run between 2 percent and 5 percent of the amount you borrow. Many home improvement personal loan lenders offer no-fee options and single-digit rates for excellent credit borrowers.
That keeps extra money in your pocket for moving expenses or to cover staging costs when your current home goes on the market. In this homebuying market, every extra dollar saved makes a difference.
3. You’ll avoid committing fraud
Any time you take out a new loan secured by your home, you have to provide a written statement confirming how you’re using the home. In most cases, the best rates and terms on any mortgage financing are for a primary residence.
If you indicate your home will be a primary residence when you intend to sell it, you could be committing loan fraud. Personal loans don’t require any proof of what you intend to do with your home, because they aren’t secured by your home.
4. Your new home financing will be protected from occupancy issues
When you take out a new mortgage, you typically sign an affidavit of occupancy about how you intend to occupy your home for the next 12 months. If you take out a loan based on primary occupancy, the lender expects that you’ll live there for that time.
If your new home mortgage lender sees that you recently took out a mortgage on your current home as a primary residence, they might consider the home you’re buying a second or investment home.
Personal loan lenders don’t ask any questions about your home beyond whether you rent or own it. That gives you one less worry if you need to finance your new home.
5. You can get funds quickly to satisfy a motivated buyer
Every single dollar of profit from the sale of an existing home makes a difference when home prices are at record highs. However, the higher prices also make it important that buyers choose homes that are move-in ready.
A personal loan could give you fast access to cash to satisfy a buyer’s repair requests without cutting into your resale profit. With minimum loan amounts as low as $1,000 in some cases, they can be a deal-saving alternative to home equity financing.
If you’re trying to max out your down payment on your new home and want to avoid touching your money, but have few outstanding credit card balances, consider borrowing a little extra to pay them off. Consolidating your credit cards and not using them again could give your credit score a big boost, and save you thousands over the life of a 30-year mortgage. Just make sure your DTI ratio is still in line with the new PL payment.
What the experts have to say about personal loans for home improvement vs. home equity products
Bankrate’s resident mortgage expert, Jeff Ostrowski, suggests HELOCs for big improvements, but not for small fixes.
One factor to consider: HELOCs and HE loans often have minimum loan amounts of $10,000 to $35,000, depending on the lender. So, if you're doing a few minor repairs, this isn't the answer.— Jeff Ostrowski | Bankrate Mortgages Principal Writer
If you don’t qualify for a HELOC and want to avoid credit card use, Ostrowski suggests looking at personal loans.
“These loans generally are designed for borrowers with lower credit scores, so they’re not tailor-made for home renovations. But they’re also in the wheelhouse — loan amounts generally fall into the sweet spot for owners doing [repairs], and the interest rates can be competitive.”
Bottom line
Personal loans should at least be on your radar if you’re thinking about making home improvements before you sell your home. HELOCs and credit cards continue to be popular choices because your payment is only based on the amount you use, but they might not always be the right tool for the job.
If your homebuying strategy includes maxing out your down payment and minimizing your credit utilization to achieve the highest credit score possible, a personal loan could be a great way to accomplish both goals.
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