While home improvement loans and home equity loans both can be used to make home improvements, their requirements can be very different.
Home improvement loans usually require the borrower to get an estimate of the repairs to be made. The value is determined by the property plus the proposed improvements that are to be completed. This is allowed because the lender pays the contractor directly in one payment, or a schedule of payments, and the project typically requires an inspection to ensure the work has been completed. The loan to value for this type of loan can be as high as 100%.
Home equity loans are distributed directly to the borrower. However, in Texas, the appraised value is determined by the current condition of the home (also called as is value) and the loan to value is capped at 80% and that amount includes all liens. Home equity loans can also be used for other things besides home improvements such as debt consolidation, college, or other large purchases.
Home Improvement Advantages:
- Value determined by improvements, which allows for a larger budget
- Less restrictive loan to value requirements
Home Equity Advantages:
- Borrower controls the money
- Money can be used for things besides improvements