Pros and cons of paying for home improvements with personal loans instead of a mortgage

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Don’t take out a personal loan to improve your home until you read this.

Key points

  • Many people borrow to cover the costs of home renovations.
  • A personal loan is one option for paying for upgrades, and they tend to be quicker and easier to obtain than other options, such as a second mortgage or cash refinance.

Home improvement projects can increase the value of your home and make your space more livable. Unfortunately, they are often expensive and many people have to borrow to make big changes to their properties.

If you’re financing home renovations with debt instead of paying for them with your savings, it’s important to choose the right type of loan. You have several options, including getting a personal loan or taking out a second mortgage or cash refi loan on your property.

While many people don’t take out a home loan because they are using the funds to improve their home, personal loans can actually be a good alternative source of finance in certain circumstances. To help you decide if a personal loan or mortgage is the best choice for you, consider these pros and cons.

Benefits of paying for home renovations with a personal loan

Here are some of the biggest benefits of using a personal loan to pay for home renovations.

  • It may be faster and easier to get approved: Mortgages – including second mortgages and cash backs – can sometimes have a lengthy approval process. It can take weeks and a lot of financial paperwork before a loan is approved and the money is made available. There may also be many hurdles to jump through, including the valuation of a home. Personal loans, on the other hand, have a simpler application process and funding can often be made available quickly, sometimes just days after application.
  • The debt is unsecured, so your home is not at stake: Many personal loans are unsecured debt, which means that there is no collateral securing the loan. In contrast, mortgages are secured debts and the house secures the loan. Therefore, if you become unable to repay it, you could lose your property.
  • You will avoid closing costs: Getting a cash refi or a first or second mortgage can end up paying thousands of dollars in upfront closing costs. You may have to pay mortgage origination fees, title insurance fees, and appraisal fees, among other expenses. In contrast, many personal loans have low or no application fees, so you don’t need to come up with thousands of dollars just to be able to borrow.

Disadvantages of paying for home improvements with a personal loan

There are also disadvantages to opting for a personal loan, rather than taking out some type of mortgage when you improve your property. Here are three.

  • Your interest rate will likely be higher: Since personal loans are generally unsecured debt, they are riskier for lenders than secured mortgages. As a result, they can have a much higher interest rate. Mortgages are generally one of the most affordable ways to borrow.
  • Your monthly payment may be higher: Personal loans can have a shorter repayment term and a higher rate than mortgages. Therefore, your monthly payment could be higher with a personal loan used to finance renovations than with a mortgage loan. This could put more pressure on your budget.
  • You will not be able to deduct interest on your taxes: Mortgage interest – including on second mortgages – is generally tax deductible if you itemize (especially if the funds are used to pay for home improvements). If you can deduct interest costs, the government subsidizes your borrowing. On the other hand, interest is not deductible on personal loans, so you do not benefit from this advantage of borrowing.

So which approach is right for you? Ultimately, it comes down to your goals, the type of personal loan or mortgage you may qualify for, the amount you borrow, and your repayment schedule. You should carefully consider each option to decide which is best for your situation in light of the pros and cons of each financing method.

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