Home Improvement Loans

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WHAT ARE HOME IMPROVEMENT LOANS?

There are many different types of home improvement loans, but they are loans meant to fund repairs, upgrades, or additions to your home. Want to add a porch or extra room? Need to finish out the basement or update your kitchen, but don’t have the money? A home improvement loan will give you the funds to turn your dreams into a reality. The hardest part about getting one of these loans if figuring out what type you need.

TYPES OF HOME IMPROVEMENT LOANS

Home Equity Loans

This type of home improvement loan is typically provided by a mortgage lender, whether it’s your current or a new one. Home equity loans let you borrow against the equity you’ve built up paying off your mortgage. So, if your home is worth $200,000 and you have $180,000 left on your mortgage, you have $20,000 of equity in your home. The more equity you have, the more you can borrow and put towards renovating your home.

Depending on the amount you’re looking to borrow, the lender may recommend that you get a personal loan instead. You may not have enough equity, you might not be borrowing enough, or maybe the numbers just don’t add up. Regardless of the reason, if they point you in that direction, it’s most likely in your best financial interest to pursue it.

Personal Loans

Personal loans are unsecured loans which means that you don’t need to put any collateral down or have a traditional credit check performed to qualify. These loans are an excellent alternative to traditional home improvement loans since they traditionally have low fixed interest rates, large loan amounts, and a low barrier to qualify. They also operate independently from your home equity so you could take out a personal loan the first week you own a home if you wanted to.

The only “drawback” to personal loans when it comes to financing a home improvement project is the shorter repayment period. You’ll typically find 2 – 6 years to be the industry standard and if you borrowed upwards of $20,000 or more, you’ll basically have an extra car payment each month while you’re paying off the loan. Keep this in mind when you’re shopping around.

Home Equity Line of Credit

Home equity lines of credit (aka HELOCs) are very similar to home equity loans except that it works more like a credit card. Just like a loan, you’re approved for a certain amount and you have a specific time period to pay that balance off. The main difference is that as you pay off your balance, that money becomes available to be used again, just like a credit card. This type of home improvement loan is exceptionally good for homeowners that have a lot of different projects planned out while having serious equity in their home.

Refinance Your Home

Depending on your mortgage lender, you can refinance your home and have an additional amount folded into your mortgage. This will just raise your mortgage by that same amount and usually results in a lower interest rate after your refinance.

This varies from lender to lender, but we usually don’t recommend doing it since the amount you’re borrowing is financed for the life of your mortgage. As you can imagine, you’ll end up paying thousands more than you originally borrowed due to interest rate accrual.

Title I Government Loans

These home improvement loans are are backed by the government and guarantees that if you default, they’ll still be repaid a certain amount of the loan. This security allows lenders to offer lower interest rates and loosening approval criteria which makes it easier to be funded. However, you’re capped at $25,000 and there are restrictions on what the loan can be used for. Even with those restrictions, this is still a great option for borrowers that have less than stellar credit or equity.

WHICH LOAN IS BEST?

There isn’t a clear cut answer to this as no two home renovations are the same and no two lenders are the same. What works for Sam doesn’t work for Sue. We recommend that you pursue all loan opportunities to find the loan that’s right for you, your family, your goals, and your home. If you still aren’t sure, get in touch with a financial advisor and they can point you in the right direction.

HOME IMPROVEMENT LOAN USES

  • Remodeling your kitchen
  • Updating your bathroom
  • Adding a patio, porch, or deck to your backyard
  • Fixing / installing a new roof
  • Making your home more environmentally friendly
  • Updating your appliances
  • Redesigning your front and/or backyard

HOW TO PICK THE RIGHT HOME IMPROVEMENT LOAN

Borrow the Right Amount

Make sure to do all of your research before you start shopping for home improvement loans. We all know that theses sorts of projects tend to take longer and require more materials than we originally thought. If you take out a loan and you need hundreds or thousands more dollars to finish it, you’ll end up footing that bill yourself or be stuck with a half finished project.

The opposite is true too. You don’t want to borrow too much and have thousands of dollars left over. Sure, you can put that money right back into paying off the loan, but that shouldn’t happen in the first place. Remember, measure twice, cut once.

Shop for the Best Deals

When it comes to your home improvement project, don’t let emotion rule your decision making. You can still get the same look, but for a lot less. You just have to do some extra leg work. That $8 per square foot tile that you just love and can’t live without? You can find a similar one for $2 per square foot with a little research. An $800 refrigerator will keep your food fresh just as effectively as that $2,000 one will. Be practical.

The same thing goes for your loan. You don’t have to go to one specific lender or refinance your mortgage to get the money you need. Shop around. Find a lender that gives you a home improvement loan with a favorable interest rate and low (or no) fees. Knocking off a percentage point or waiving fees can save you hundreds or thousands of dollars. Don’t settle on the first offer.

Focus on the Long Term

If you’re going to sell your house before you pay off your loan, it may not be worth it. You’ll need to pay off both your house and your loan once it sells and however much you borrowed may eat up most (or all) of the profit from the sale. Granted, you won’t have a mortgage anymore, but you always want to make money when you sell a house. Breaking even is the same thing as losing money.