Are you looking to transform your humble abode to mirror your personality and showcase your creativity? From a much-needed kitchen renovation or a cozy bedroom makeover to transforming your entire home, let’s look at what a home improvement loan is and how you can get one.
What Are Home Improvement Loans?
A home improvement loan is a type of loan that you can use specifically to finance the costs associated with home repairs or remodels. While you can purchase a home with a home loan, a home improvement loan enables you to improve the home you already own.
It helps fund a range of improvement projects, including full-scale renovations to remodeling a single room. The funds you obtain with a home improvement loan can also be utilized for necessities like replacing an outdated plumbing or HVAC system or repairing a leaky roof.
If you’re wondering why you’ll need one, it’s because fixes, repairs, or remodeling projects are often costly undertakings. These loans will come in handy, especially if you’ll be using the services of custom home builders that will likely cost you at least a five-figure sum.
What Types of Projects Require a Loan?
From minor upgrades to major transformations, you can get a home improvement loan for various projects. Here are some types of projects that might require a home improvement loan to help cover the expenses:
- Hiring remodeling services for your kitchen or bathroom remodeling
- Hiring roofing services for any roof repairs or a total replacement
- Investing in energy-efficient upgrades to reduce your carbon footprint and lower utility bills
- Room additions
- Project to enhance your home’s curb appeal or create inviting outdoor spaces
- Structural repairs like water damage, foundation issues, or other problems
What Are the Different Types of Loans?
If you’re looking for a home improvement loan, it will help to know about the different types available and how they work.
1. Personal Loan
Personal loans are one of the best options for a home improvement loan, especially if you’re uncomfortable using your home as collateral against a loan. You can use a personal loan to fund any expense, including home improvements.
Homeowners with a good to excellent credit score requiring fast finance can choose this option. You must make monthly payments for a personal loan to pay off the balance and interest charges.
You can obtain personal loans from private lenders, credit unions, or banks. However, you may face higher interest rates but with shorter repayment terms.
2. Home Equity Loan (HEL)
Often called a second mortgage, this type of home improvement loan is an excellent choice for homeowners with a stable income and high equity. The equity is the value of your home minus any amount you owe on it. You’ll be using your house as collateral.
Typically repaid over 5-30 years with fixed monthly payments, you can use this money for costly expenses, including when you hire custom home building services, long-term medical care, or even college.
Since this type of loan can’t exceed 85% of your home equity, keeping a budget in place before considering this option is ideal. However, if you’ve managed to build up a substantial amount of equity in your property, a HEL might be a good solution for you.
Homeowners who already have a loan and still owe money must remember that these loans have often been associated with higher interest rates. A HEL will add another monthly payment to your budget.
3. Home Equity Line of Credit (HELOC)
A HELOC works on similar lines as HEL; it also uses your home as collateral and loans money against the amount of equity you’ve built up. Taking a HELOC is also essentially a type of second mortgage.
The typical draw period of this type of loan is ten years, when you can use all or some of the funds you’re approved to borrow. You’ll make interest-only payments during that time, while the later repayment period involves repaying interest and principal.
Since you needn’t pay the principal amount during the draw period, it makes sense to go for a HELOC if you plan to sell in the foreseeable future. The pending principal amount will be deducted from your sale, and you needn’t repay the funds out of your pockets.
HELOC has adjustable interest rates; they can vary over the loan’s term. However, the interest is applicable only for the amount you’ve borrowed and not for the entire loan amount.
4. Cash-Out Refinance
Yet another good option for larger projects is cash-out refinance. This option allows you to tap into your home’s equity by refinancing for a higher amount than you owe on your current mortgage. The remaining amount will be paid to you in cash.
For example, if you owe $100,000 on your home but have built up $75,000 equity and want to make $20,000 worth of renovations, you can utilize cash-out refinance. You can refinance a new mortgage with a $120,000 balance and pull $20,000 out of your equity.
You can access 80% of your home’s value while leaving out 20% equity. Since this is a new mortgage, it makes the most sense if the new loan offers better interest rates and terms. It’s also worth it if you’re financing improvements to increase your home’s equity and value.
Note that this option has higher closing costs that apply to the full loan amount rather than just the cash-back.
5. FHA Rehab Loan
Bringing your home improvement costs and mortgage into a single loan is an FHA rehab loan. With this loan, you needn’t pay closing costs twice or apply for two separate loans.
The U.S. Department of Housing and Urban Development’s (HUD) Section 203(k) loan program is ideal for those requiring the most extensive home repairs. Enquire with HUD-approved mortgage lenders for a rehab loan, which will be insured by the Federal Housing Administration (FHA).
This loan type also allows you to finance the purchase of run-down properties based on your creditworthiness and income. It can be an adjustable-rate mortgage or a 15- or 30-year fixed-rate mortgage.
While one part of the loan pays for the home, the remaining amount is put into an interest-bearing account and is released at specific intervals as the work continues. Among the perks of this type of home improvement loan is that the down payment is as little as 3%.
It’s suitable for low-to-moderate-income individuals and families. If you’re on a tight budget and have a fixer-upper on your hands, this is an excellent option. While you can’t build a home from scratch, you can demolish or raze an existing structure, provided you preserve the property’s foundation. The loan applies only to residential properties at least one-year-old and made of one to four family units.
6. Credit Card
Credit cards are an easy option for affordable, small-scale projects. Consider using a credit card with a 0% APR introductory period that lasts between 12-21 months. With a 0% APR card, you must only borrow what you can pay off entirely within the interest-free period.
Depending on the program associated with your credit card, you can access various perks, including cash back for gas purchases or travel rewards. Credit cards offered by home improvement stores can provide access to in-store discounts while shopping.
Keep in mind that credit cards aren’t a good option if you’re looking for renovations that require a massive amount of expense. If you’re looking for a paint job, a new appliance, or a fence, use your credit card for the costs.
Credit card interest rates are often higher than loan amounts; if you have a larger project, you might end up pushing your total available credit ratio too high, negatively affecting your credit score.
Ideally, you must keep your credit utilization ratio below 30%. Credit card APR rates are among the highest (16-24%), and outstanding debt can quickly snowball, impacting your creditworthiness.
How Do You Determine Which One Is Right for You?
With the different options for home improvement loans, you might find it challenging to decide which is right for you. A financial advisor might be able to help you best, especially if you’re considering an expensive project.
First, you must assess your project’s scope and cost. This will involve the cost of the materials, labor, and additional expenses. A personal loan or HELOC may be suitable for minor repairs or renovations. However, a cash-out refinance, or HEL, with higher borrowing limits, is the better option for more substantial projects.
Then, you must research the different loan options, features, eligibility criteria, interest rates, and repayment terms. If you have considerable equity built, HEL or HELOC are viable options. However, if you’re still paying off your mortgage or have limited equity, go for a personal or FHA rehab loan.
Getting a loan is easier if you have a good credit score and a stable income; you’ll qualify for better interest rates and terms. Suppose you have a low credit score or a less stable financial situation; you can explore FHA loan options or seek assistance from a debt relief law office.
How Much Do They Typically Cost?
The total expense of a home improvement loan varies based on the loan amount, interest rate, and repayment terms. Most interest rate percentages range from single to double digits, depending on your creditworthiness and the lender’s policies.
As for loan amount, the larger the borrowed sum, the higher the monthly payments and interest paid over the duration of the loan. Typically, shorter repayment terms result in higher monthly payments but lower interest rates, while longer terms offer lower monthly payments with higher interest.
Additional costs associated with home improvement projects stem from hiring restoration services company for specialized tasks or obtaining homeowner insurance to protect your investment. Before applying for a loan, you must factor these costs into your overall budget.
Consider using loan calculators or consulting with lenders to obtain detailed information about the terms and conditions to make an informed decision.
What Should You Expect?
When you’re considering a home improvement loan, it’s essential that you set realistic expectations. If you understand what to expect, you can navigate the loan process smoothly and make informed decisions.
Expect an application process where you must complete a loan application and provide the required information. After you submit your application, there will be a waiting period for loan approval.
Once approved, you’ll receive the details about the approved loan amount, interest rate, and repayment terms. Always review these terms carefully, as they’ll determine the total cost of the loan and how long you’ll be making payments.
If you’re hiring a residential roofing company or any other contractor for your home improvement project, the lender may require details about that too. Upon approval and finalization, you’ll directly receive the funds. You’ll be responsible for making regular monthly payments on time to avoid a negative impact on your credit history.
How Do You Get One?
Obtaining home improvement loans involve comparing figures and monthly payments, preparing your final documentation, and applying for it.
The process always starts with determining your project’s scope. Whether it’s kitchen and bath remodeling services, room additions, or new furniture, clearly estimate the costs involved. After you’ve assessed your financial situation and researched loan options offered by different lenders, you must gather the required documentation.
Commonly required documents include ID, proof of income, tax returns, and proof of home ownership. The lender may request estimates and licensing information of the contractor if you’re working with one.
After completing the application form, you submit it and await approval. The lender will evaluate the project’s feasibility and your creditworthiness. If found suitable, you’ll receive communication of the loan approval.
Once your loan is approved, the loan disbursement stage comes next. You’ll receive funds from the lender to the account details you provided, and you’re ready to start your project.
You mustn’t always jump at the first choice. Instead, you must navigate the process with careful consideration and choose wisely when applying for a loan.
Take your time to research the different lenders and loan options. Look for a reputable lender who can help with a smooth borrowing experience. Evaluating your budget and deciding how much you can comfortably afford to borrow and repay is equally important.
Always read the fine print when it comes to loan applications. Weigh your options of an unsecured or secured loan involving your home as collateral. And if you’re uncertain about the loan process or you’re in a complex financial situation, you can consult a lawyer or financial advisor for guidance.
You’ll need insurance coverage to protect your investment; consult your insurance provider to understand the requirements. Finally, if you have any queries or concerns, communicate clearly with your lender to address the same.
Don’t forget to keep detailed records of all loan-related documents. You never know when they might come in handy for future reference or to help resolve any disputes that may arise.
A home improvement loan is designed to help you finance any repairs, upgrades, or enhancements of any scale. Whether you’re a DIYer, home or property owner, or deal in real estate, these loans make home improvement projects possible for anyone who can pay for it.