Home Equity Loan vs Home Improvement Loan: Which Fits Your Need?

November 18, 2022

When you find it necessary to make home renovations or other unexpected major residential expenses, you might need help securing financing for your projects.

Home equity loans and home improvement loans are two of the most popular lending options for homeowners to fill that need. It’s important to research each option and necessary loan requirements before deciding which is the right fit for you.

Discover the pros and cons of choosing a home equity loan vs. home improvement loan, the application process for these loans, and why Texas Gulf Bank is the ideal lending partner for all your personal funding needs.

The Basics of a Home Equity Loan 

Home Equity Loans allow you to use the equity you have built in your residence as collateral. A home equity loan requires that total mortgages (existing mortgages plus the home equity loan) cannot exceed 80% of the Fair Market Value of the home.

Home equity loans are an ideal option if you need to fund a one-time expense or ongoing needs, borrow a larger lump sum of money and need a flexible repayment period. They are one of the most popular types of loans because funds can be used for a wide range of purposes, including:

• Home improvement or remodeling projects
• Debt consolidation
• College expenses
• Vehicle purchases
• Covering expenses after emergencies
• Purchasing a second home
• Business investments

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A home equity loan is ideal if you plan to make your own repairs or manage improvement projects directly with your contractor since payments are made as a single lump sum. It’s also important to remember that home equity loans are based on the home’s current value before any improvements or additions are made, unlike a home improvement loan, where those future improvements are factored into the total home value.

Home equity loans will not require a down payment like a primary mortgage, but closing costs are involved for both types of loans, such as application fees, title search costs, and appraisal fees.

Like a traditional mortgage, home equity loans involve a thorough application process, so if you have little equity built up or if you don’t have a strong credit history, it may be harder to qualify for a home equity loan.

As with a home improvement loan, the most significant risk is the possibility of losing your home and property if you cannot repay the loan. In addition, the loan terms for a home equity loan typically include a flexible repayment window. 

How a Home Improvement Loan Works 

Homeowners that need financing for major repairs and renovations may consider a home improvement loan for their funding needs. This is a loan that is secured by a Builder’s and Mechanic’s lien contract assigned to the bank. Typically, this type of loan allows you to gain access to funds for use on a full range of home improvement projects, such as:

• Bathroom or kitchen renovations
• Adding bedrooms
• Expanding patios or garage space
• Roof replacement
• Pool installation

A home improvement loan is intended for projects that require a contractor to perform the work. If you are approved for funding, the approved funds will be distributed by the lender as work is completed based on construction timelines and draw periods. A major benefit of this type of loan is that you can borrow up to 80% of any equity (equity equals the market value less any outstanding debt on the home), with the improvements factored into the value.

Home improvement loans may be a more cost-effective solution for repairs and renovations compared to a credit card, where you could face more fees and higher interest rates. The loan application process for a home improvement loan is similar to a home equity loan; however, a home improvement loan may have a shorter window to repay the loan and (like all loan types) requires a good credit score as defined by TGB underwriting guidelines.

Loan Application Process: Home Equity Loan and Home Improvement Loan

When your home needs renovations or repairs, or if your family needs access to funds for other major expenses, you can choose between a home equity loan, a home improvement loan, or even a combination of both, depending on your lending needs.

At Texas Gulf Bank, we offer an efficient, straightforward loan application process to help you meet your personal finance goals.

The application process for these personal loans begins with an initial assessment to determine if you qualify for loan approval.  We will review the following information:

• Current income levels
• Credit history and score
• Outstanding debts
• Existing home mortgages
• Debt-to-income ratio 
• Proof of builder’s license and credentials

Applicants will need to demonstrate sufficient income sources to repay loans, as well as provide documentation including, but not limited to:

• A completed loan application
• Two years of personal tax returns
• Current pay stubs if currently employed
• Pension or Social Security payment history if retired
• Three years of business tax returns for self-employed
• Balance sheet and income statements for self-employed
• Construction budget and contractor contract

Once all requested documentation is received, we begin our in-house review process, which both home improvement and home equity loans can take a few weeks to complete. During this period, our lending officers will gladly answer all applicant questions during the loan process to make the loan process as smooth as possible. 

Choose Texas Gulf Bank for Your Personal Loans 

Texas Gulf Bank has proudly served individuals and families throughout the Gulf Coast region for over 100 years, and we are eager to provide customers with reliable financial resources and prompt funding for their personal loan needs.

If you’re ready to renovate your current house into a dream home, or need funding to accomplish your long-term goals, Texas Gulf Bank can help! Our team of experienced loan officers can discuss a home equity loan versus a home improvement loan and determine which is the best fit for your needs.

Contact Texas Gulf Bank today for more information. Or, if you’re ready to begin the application process, simply fill out the form above. One of our helpful, local lenders will follow up with you.

All Loans Subject to Credit Approval