Home renovations cost around $41,600 on average. Around 60% of respondents say that they have done home improvement projects over the past year. It increases the value of your house as an asset and lets you upgrade several of its features.
You would need finances to make the changes to your home that you consider necessary. A home improvement loan provides you with the necessary capital to invest in your home.
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What Are Home Improvement Loans?
A home improvement loan helps you pay for any major home improvement projects or expenses. You may use the loan to make essential home repairs.
The main difference between types of home improvement loans is whether they are secured or unsecured. A lender advances a secured loan against some form of collateral. There might be the risk of foreclosure upon default.
An unsecured loan allows you to take the loan amount without putting up any collateral. You need not put any of your assets at risk; however, these loans might be difficult to qualify for.
Why Consider a Home Improvement Loan?
The amenities and furnishings in your home determine its resale value. Home improvements are a good way to restore your home’s value if it has depreciated, or increase your home equity.
In case you are looking to enhance your living conditions, home improvement is a good decision. You can use improvement loans to remodel the kitchen, or improve the curb appeal through landscaping.
You will have to adjust your budget according to the pending mortgage monthly payments.
What are the Types of Home Improvement Loans?
Following are some of the different types of loans for home improvement:
Personal Loans
A personal loan allows you to borrow a specific amount of money, which you must repay with interest according to a set schedule. The lender determines the term of the loan and there is usually no collateral involved.
Personal loans are ideally suited for people who have a good credit score, at a level above 580. The borrower gets the loan amount in a lump sum. There is no risk of property foreclosure in case of default. However, legal action might be taken.
Home Equity Loans
A home equity loan lets you borrow money using the value of your home as a guarantee. As it is a fixed rate loan, you need not worry about changes to the interest rate. A home equity loan usually allows you to borrow more than a personal loan.
An important component of the home equity loan is the annual percentage rate, which refers to the total interest which is levied on all charges pertaining to the loan. If the loan remains unpaid, the lender can seize the home to recoup the debt.
Home Equity Line of Credit (HELOC)
The Home Equity line of credit provides a flexible financing option for the borrower. You apply for an open line of credit, and can make further borrowings according to a need basis.
Typically, the HELOC will have interest rates that are lower as compared to a home equity loan, and there will be greater flexibility regarding the repayment tenure.
Cash-Out Refinance
Cash-out refinancing is borrowing more than what you owe on an existing mortgage, at lower interest rates based on your home equity. You can use it to consolidate your existing loan and access additional cash.
You will need to perform a home appraisal, to see whether the home value has changed. Although, you may risk depleting your home equity.
FHA Rehab loan
There are generally different kinds of FHA rehab loans. The two most common types are the Title 1 property improvement loan, and the FHA 203(k) rehabilitation mortgage.
The Federal Housing Administration insures an FHA rehab loan. This ensures that the approved private lenders are likely to provide loans at lower interest rates.
How to Choose the Right Home Improvement Loan?
Take the following steps to choose the best home improvement loan for you:
Assess Your Home Improvement Needs
- Make a list of all required renovations, along with a budget.
- Lenders may usually have credit score limits according to which they grant loans to the borrowers. The credit score will usually have to be good for an unsecured loan.
- Lenders consider other parameters such as home equity and debt-to-income ratio to determine a borrower’s loan eligibility.
Compare Loan Options
You should carefully consider the available loan options and choose the one best suited to your needs. For instance, if you do not have a lot of home equity, you may consider going for a personal loan.
The interest rate and down payment are the main components, upon which you should base your decision. In addition, make sure to thoroughly go through the loan terms as well as the flexibility on offer.
Apply for a Home Improvement Loan
The lender will inform you of the required documents. In case you are applying for a home renovation loan, you may need to provide an agreement with the contractor.
Some of the standard documents which are usually required are:
- Residence Proof
- Income document
- Government issued ID
- Social Security number
Pros and Cons of Using Loans for Home Improvement
Here are some of the pros and cons of using loans for home improvement:
Pros
- Better living conditions: They can be improved by utilizing the loan.
- Deductions: Certain loans such as the home equity loan as well as the HELOCs can be tax-deductible.
Cons
- High cost of repayment: High mortgage interest payments can be an issue when it comes to repayment.
- Utility issues: The renovation improvements that you make to your home might not justify the taking of an expensive loan.
Alternatives to Home Improvement Loans
These are some alternative strategies to finance your home’s improvement:
Use Savings or Emergency Funds
You can use your savings to fund your home improvements. In this case, you would not need to make any monthly mortgage payments.
Credit Cards for Home Improvements
If you don’t have sufficient cash, consider using your credit card. This might also make you eligible for various rewards. You should repay the debt quickly, as credit cards typically charge high interest rates.
Bottomline
Home improvement is strategically beneficial for you. It allows you to improve the valuation of your home, giving you leverage. You can make repairs and renovations, while also purchasing new furniture and furnishings.
As there are multiple home improvement loans available, it makes sense to compare them. This lets you see which financing plan is suitable for your project. The loans suitable for home improvement include personal, home equity, HELOCs, and FHA loans.
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Frequently Asked Questions
1. What credit score do I need to qualify for a home improvement loan?
It varies from lender to lender. The requirements for home improvement loans are often stricter than those for mortgages, which is due to the fact that the loan is unsecure.
2. What is the average length of a home repair loan?
2 to 12 Years. Some lenders let you choose the length whereas some may offer term longer than that.
3. Are home improvement loans tax deductible?
Home equity loans are tax deductible as you use your home as collateral for the loan.
