What’s the Difference Between HELOCs and Unsecured Loans for Roof Financing?

Why Financing Matters

Store-brand potato chips can taste just as good as name-brand potato chips for one-third the price. That tradeoff works great in the snack aisle, but it doesn’t work as well with the roof over your home. “Store-brand” roofs might get a 5-year warranty instead of a 50-year warranty, myriad costly emergency repairs from leaks instead of peace of mind, and potentially premature replacement. A high-quality roof is a smart investment, but it rarely comes at a convenient time. How can you get a roof that lasts a lifetime and fits your budget?

Financing.

Financing is available for cars, houses, Amazon purchases, concert tickets – it’s ubiquitous. Finding financing can be easy. Finding financing that has clear, favorable terms can be more involved. It’s the paradox of choice: homeowners have more options than ever. For emergency repairs or re-roofs with an insurance-imposed deadline, the process of sifting through these options can add stress, not provide relief like financing options should.

This article simplifies that process by breaking down two common types of funding: Unsecured loans and HELOCs (secured lending) and the key differences between them.

Disclaimer: This article is meant to help homeowners understand the basics of common financing options. It’s not financial advice, and it doesn’t reflect any specific loan offer. Terms availability, and eligibility vary be lender. For personal advice or details on a specific loan, please speak with a qualified lender or financial advisor.

When You Might Choose to Finance Your Roof

Most people don’t plan for a new roof, just like most people don’t budget for emergency AC repairs in the Summer. Storms can be sudden, and sometimes a roof’s just at the end of its life and begins showing symptoms of it. Either way, financing a roof doesn’t mean you can’t afford it. It means you’re choosing how to afford it in a way that fits your budget and timeline. Sometimes, when an unexpected roof replacement is needed, it’s critical to regain some agency through financing.

No two homes are the same. Some homeowners just want to defer payments, while others prioritize spreading out costs over time. Below are a few common reasons homeowners finance their roofing projects.

Investment Optimization

• We had a customer that owned a private plane, had rental properties, and had the liquidity to comfortably pay for a roof replacement out of pocket. They decided to finance instead. The reason? “My money makes more money invested than the interest I’ll pay by financing.” For homeowners who use their brokerage accounts as a savings account, financing can preserve investments and liquidity, especially when terms allow for full repayment before interest is applied. Sometimes, it’s not about the ability to pay. It’s about making smart use of available options.

After Other Home Improvements

• Many customers buy a house and promptly invest in updated windows, siding, a bathroom remodel – all smart investments that appreciate the home’s value. Then the roof starts leaking. Even the most organized budgeters can’t expect the unexpected, especially after budgeting for large scale home improvements like those. Financing the roof allows them to address an immediate problem before it damages the roof’s decking and the home’s interior, resulting in additional expenses.

Preserving Cash Flow

• Paying for a roof out of pocket is possible for many families, but that doesn’t make it preferable. Groceries, utilities, and clothes for the new school year don’t inherently come with financing options, so keeping cash on hand means a new roof won’t interfere with those expenses.

Insurance Requirements

• As insurance carriers continue to adapt coverage, some customers find themselves needing a new roof to maintain or extend coverage. This can include older roofs, or 3-tab shingles that are no longer considered insurable. If no insurable damage is present, insurance might not assist with the cost. Financing gives homeowners a way to meet insurance prerequisites and get covered. If insurance extends a payout, those funds can be used with the loan’s funds.

What Is an Unsecured Loan?

An unsecured loan is a type of loan you can get that doesn’t require collateral. Approval is based primarily on your credit score and your income. They’re fast, flexible, and don’t require home equity. If you need to move quickly and have a clear scope of work, like a roof replacement, unsecured loans can be an effective funding option.

What Is a HELOC?

A HELOC, or Home Equity Line of Credit, is a secured lending option that lets you borrow against the value of your home. As a line of credit, it’s like a credit card with a borrowing limit based on how much home equity you have. They take longer to set up than unsecured loans and require your home as collateral, but they have broader utility and higher borrowing limits.

What’s the Difference Between HELOCs and Unsecured Loans?

 

Credit Score

Unsecured Loans

At its core, a credit score is essentially a trust score. Loaning a friend money is less stressful if you’re in possession of their car. It gives you some assurance that they’ll pay you back. If the friend has a history of prompt repayment, you’re probably comfortable loaning them money even without their car.

That’s why credit score matters so much to lenders. If they’re not in possession of your car (collateral), they need to trust that they’ll get repaid. A higher score shows that you’ve repaid debt responsibly, resulting in better rates for unsecured loans that are credit-based.

The bottom line is that your credit score is likely to be carefully considered by lenders offering unsecured loans, both as a threshold to determine whether you qualify and to determine your rate and term length.

HELOCs

For HELOCs, or any secured lending option, the lender has your car, so they’re less concerned with your trust score.

Because HELOCs require your house as collateral, lenders are exposed to less risk. This doesn’t mean that lenders don’t consider your credit score with HELOCs – they usually do, and the higher the better. Instead, it means that HELOCs consider much more than just your credit score. HELOCs also consider:

• Home Equity: Home equity is the part of your home that you’ve paid for outright. If your home is worth $300,000 and you owe $200,000 of principal, then you have $100,000 in equity.
• Debt-to-Income Ratio (DTI): Some lenders consider how much of your income goes toward existing debt. A lower DTI has the potential to lower your rate or increase your chances of getting approved.
• Appraised Home Value: Since your home is the collateral, it often needs a current appraisal so the lender knows its value.

There are many more factors that lenders might consider when qualifying you for a HELOC. The key takeaway here is that collateral can provide your credit score with additional wiggle room.

Approval Process

Unsecured Loans

Unsecured loans can be processed much quicker than most secured loans. Some unsecured loans can receive approval from the lender within 24 hours. There are a few reasons for this.

• Review Process: Lenders often have thresholds. When reviewing your application, the lender will simply review whether your credit score, DTI, and other considerations meet those thresholds. There’s less discretion and more binary responses, expediting the approval process. Automated underwriting can speed this process up even further.
• Minimal Paperwork: Unsecured loans often require nothing more than identity verification and consent for a soft credit pull.
• Predictable Terms (Fixed-Rate): Unsecured loans with fixed rates often present clear payments and terms upfront, simplifying decision-making for both you and your lender.

As with most differences between secured and unsecured loans, the differing approval process lengths between secured and unsecured loans is due to collateral.

HELOCs

Because lenders consider more with them than unsecured loans, the approval process for HELOCs can take longer. Lenders typically appraise your home and verify your reported equity in it. Once that’s done and you have funding, you have a flexible line of credit that you can draw from for the duration of the HELOCs draw period.

Loan Amounts

Unsecured Loans

Unsecured loans typically have lower borrowing limits than secured lending options. With no collateral tied to the loan, lenders generally limit how much you can borrow, which adds safety for both sides. The lender isn’t risking as much money upfront and the borrower avoids overextension.

Funding is used on projects with a clear scope, like a roof replacement, without requiring your home’s equity. Because projects funded by unsecured loans generally have a clear scope, you usually know what you need. Higher limits usually aren’t necessary.

HELOCs

One of the main advantages of HELOCs is their high potential borrowing limits. The exact limit varies, but it’s dependent on your home equity. The more of your home that you’ve paid off, the more funds you can access.

Because HELOCs don’t require a narrow scope of work like unsecured loans often do, you’re free to use borrowed funds for many purposes. As a fringe benefit, interest on the HELOC’s drawn funds may be tax deductible if the funds are used to improve your home.

Insurance Compatibility

Unsecured Loans

Unsecured loans work independently from your insurance policy. Because there’s no collateral, the funds are yours to use right away, even while your claim is being processed. That means you can get started and simply reimburse yourself when an insurance check arrives.

The insurance payout is used appropriately in this case. It’s still covering the loss by reimbursing the loan.

HELOCs

HELOC funds may be used in tandem with insurance payouts, just like most unsecured loans. Most HELOCs require homeowner’s insurance for the same reason a mortgage almost always requires homeowner’s insurance: it protects the lender. However, because the lender uses your collateral (house) to mitigate risk, a line of credit may require additional insurance protections. For example, a prerequisite for a HELOC on a coastal house may be flood coverage.

Interest Rates

Unsecured Loans

Unsecured loans don’t require collateral, so lenders use interest to cover their risk. Interest rates are generally higher for unsecured loans than secured loans as a result. Your interest rate on an unsecured loan might be determined by a few factors.

• Credit Score: Some unsecured loans offer fixed rates for anyone who meets a minimum-required credit score. This means that, if you qualify, your interest rate will be the same as other qualified applicants that have higher or lower credit scores. Other unsecured loans base your loan’s interest rate on your credit score, in which case a higher score results in a lower interest rate due to the lender’s lower perceived risk.
• Loan Term Length: Longer loan terms often come with higher interest rates. The variable term lengths unsecured loans can offer provide homeowners with the flexibility to choose terms that work for them. The tradeoff is that increased interest rates may increase the loan’s total cost over time.
• Debt-to-Income Ratio (DTI): Some lenders consider how much of your income goes toward existing debt. A lower DTI has the potential to lower your rate or increase your chances of getting approved.

HELOCs

HELOCs generally have lower interest rates than most unsecured loans. As with most of the differences between unsecured loans and secured lending options like HELOCs, the interest rate difference is due to collateral. Because HELOCs are lines of credit, many of them only charge interest on borrowed funds, not the available amount of funds.

During the draw period, the only payment most HELOCs require are payments on interest, generally resulting in low initial monthly payments. Interest rates for HELOCs are often variable unlike most unsecured loans, which has the potential to reduce your rate even further.