A MoneyTips Guide to Home Improvement Loans

Home Improvements, Home Loans, Loans

Thinking of renovating or remodeling your home? You’re in good company. More people than ever are choosing to stay put, investing their time, money and effort into home improvements instead of selling. 

One of the biggest reasons is hypercompetitive housing markets, which are increasing property values across much of the country. And if you can update your home, you’re adding even more to the already rising value of your home.

It’s not always easy to sell high and find something you like in the same price bracket. Besides, you may already live in your favorite area, and you’re close to amenities or simply have a good relationship with your neighbors. 

But let’s face it, those home improvements can run into hundreds if not thousands of dollars. Some of us may not have the finances to make that dream, equity-building home makeover come true. Sooo … how do you pay for it? 

To get the most out of your investment in your home, it helps to have the best home improvement loan for your financial circumstances. 

Use this guide to get the insight and information you need on loan requirements. Learn how home improvement loans work, what you qualify for and how to find a lender.

What Is a Home Improvement Loan?

Home improvement loans are designed to cover the costs of home repairs, upgrades, remodels, additions and other renovations. There is a wide range of loan options out there, including secured and unsecured loans. 

How Do Home Improvement Loans Work? What Are Their Benefits?

There are different rules and terms for home improvement loans. Each comes with its own pros and cons.

Loan Type How It Works Why Consider It
Personal Loans Types: Typically unsecured installment loan with fixed monthly payments over a set repayment term (there are also secured loan options)

Disbursement: Lump sum (usually $2,000 – $50,000)

Average repayment term: 1 – 7 years

Conditions: May include an origination fee, an early payoff penalty

Personal belongings/assets aren’t used as collateral for unsecured personal loans

Any funds not used for home rehab can be spent any way you choose (pay off credit cards, pay on mortgage principal, etc.)

Competitive interest rates for creditworthy borrowers

Personal loan APR is usually lower than credit cards

Less complicated than many of the other options

Fast funding (usually within a week)

Cash-Out Refinancing Type: Mortgage loan that replaces current mortgage

Disbursement: Cash-out amount can’t be greater than 80% – 90% of your home equity amount in most cases

Average closing costs: 3% – 6% of the loan amount

Conditions: Requires home equity and loans over 80% of home’s value require private mortgage insurance (PMI)

Can get you a lower interest rate if you bought your house when rates were higher

May be eligible for a mortgage interest tax deduction when used for qualified home improvements

Smart renovations with a high return on investment can help you get back the equity you’re cashing out in the refinance

Home Equity Line Of Credit (HELOC) Type: Line of credit (typically has variable interest rate)

Average Term: 10-year draw phase, 15- to 25-year repayment phase

Disbursement: Via bank transfers (sometimes on a lender-issued HELOC credit card)

Conditions: Must have about 15% – 20% equity in your home and start paying back equity with interest after draw phase ends. There are potential small closing costs. You’ll also start accruing interest as you draw money against your line of credit. It’s also a type of second mortgage and may come with a higher interest rate

By spacing out expenses, you can avoid interest charges until you need the money

Competitive interest rates compared to credit cards and personal loans

Can make smaller interest-only payments during the draw period

Potential tax deductions on HELOC interest for some eligible home improvements

Doesn’t replace or affect your first mortgage

You can pay back funds taken out during the draw period to use them on other projects later on, up until the beginning of the repayment period

Home Equity Loans Type: Secured installment loan/second mortgage with fixed monthly payments over a set repayment term

Average term: 5 – 15 years

Disbursement: Cash lump sum of up to 85% of home equity amount

Conditions: You need to have home equity (typically at least 20%), and again, this is a second mortgage, and the interest rate may be higher

Fixed interest rate with predictable monthly payments

May be helpful for big dollar renovation projects

Competitive interest rates

Home improvements with a high return on investment can help you recover lost home equity

Credit Cards Type: Revolving credit with variable interest rates

Disbursement: Fluctuating monthly payments

Conditions: Credit line, interest and other terms that depend on income, credit score and other criteria. There may be opportunities for cash-back rewards and potential for interest-free introductory periods that last up to 18 months 

Personal belongings/assets won’t be used as collateral
Government-Backed Loans Type: Department of Housing and Urban Development (HUD) insurance programs that secure loans from participating lenders:

Federal Housing Administration (FHA) Limited 203(k) Rehab: Borrow up to $35,000 for eligible home improvements, which will be financed into existing mortgage

Title I Property Improvement Loan: Up to $7,500 is typically unsecured. There’s a max loan of up to $60,000, depending on the number of units in your property. The longest term is 20 years and 32 days. Yeah, oddly specific

FHA Energy-Efficient Mortgage (EEM): Energy efficiency improvements with an FHA-insured mortgage

Section 504 Home Repair: For repairs, improvements, upgrades or safety and health-related renovation work. The max loan is $20,000 for most areas and offers a 20-year term and 1% interest rate. Applicants must make no more than 50% of the area median income and live in an eligible rural area

Typically doesn’t require a minimum home equity amount

Lenders must be HUD/FHA or USDA approved

May be more affordable than conventional loan options

Lower credit scores may qualify but must demonstrate creditworthiness and a proven ability to repay loans

Unsecured loans may look enticing since you don’t have to put up your property for collateral. But they’re harder to get, and the terms aren’t as good as secured loans.

How To Use a Home Improvement Loan: Let Us Count the Ways

Home improvement loans cover A LOT. You can spend the funds on just about anything that will make your home more valuable, comfortable and attractive. 

Here are just a few examples –

Make your home more enjoyable and livable:

  • Add or remodel a bathroom
  • Add an outdoor kitchen
  • Upgrade outlets for laptops, cellphones and other devices

Expand your living space:

  • Convert your garage into a living space
  • Convert your attic into an extra bedroom or home office
  • Build an additional dwelling unit (ADU)

Beautify your space:

  • Window treatments
  • Remove or transform outdated features (bye-bye, popcorn ceilings!)
  • Paint your cabinets

Make energy-efficient upgrades:

  • New LED lighting fixtures
  • Upgraded water heater
  • HVAC upgrades (like thermostats and furnaces)

Create curb appeal:

  • Updated exterior doors
  • Build a deck or patio
  • New landscaping

No matter what your heart is set on, make researching the return on investment (ROI) for the proposed projects your first order of business. Make sure the cost of the improvement isn’t more than the value it will bring to your property unless the amount you lose is exceeded by the utility you personally get out of the improvement. Also, make sure that you can afford the payments on your new loan – so you can still afford to live your best life. 

Do You Qualify for a Home Improvement Loan? Gather Some Deets

There’s no easy answer to this one. You have to do your research! 

Begin with a full overview of your financials, your credit situation and your budget for the home improvement project. Contact your mortgage lender for tips and best practices to get the most out of your home improvement loan. 

Start with the basics

Lenders want to know your personal info: Are you single or married? How many dependents do you have? What do you do for a living and how long have you been doing it? How long have you owned your home? 

These questions might feel a little intrusive on a first date, but this is a long-term commitment with a lot of money on the line. Your lender needs to feel confident that you can make your monthly payments and repay the loan. 

Credit history and credit score

Let’s get this party started! It’s all about the Benjamins – and the FICO® score – baby.

What’s your credit score, credit utilization rate, debt-to-income (DTI) ratio and bill-paying history? Get those details, and you’ll get a better idea of whether you meet the qualifying criteria for a lender.

Don’t apply for new loans or credit cards 3 (or more) months before you apply. Lenders are wary when borrowers take on new debt right before asking for more money.

Annual income and employment history

Been working at the same job for two or three years? Points for you! Review your financial documents – like your pay stubs, bank statements, direct deposits and W-2s – and calculate your annual income. Lenders want to see that your income covers all of your debts, living expenses – and then some.

How much do you want to borrow?

Whether you’re looking at revolving credit or installment loans, you need to know your home improvement budget before you apply. Crunch those numbers to get an accurate estimate. Psst … mortgage calculators can be a great help here! 

Proof of assets

What do you own and how much money do you have? These are your assets. 

People who want a home improvement loan should have at least a checking and savings account. But there’s more! 

How about stocks, bonds, mutual funds or a money market account? Have you been paying into a retirement account? Do you own a vehicle? Is it a car, truck, RV or boat?

If you’re going the home equity route, you need to know what your home is worth and what you still owe on it. 

Subtract your remaining mortgage amount from your home’s value and ta-da! You’ve figured out your equity. You may need to request an updated valuation (aka real estate appraisal) or ask a real estate professional to give you a new estimate on your home. 

One size doesn’t fit all

Not all home improvement loans are the same. And not all lenders are the same either. Expect some variation in your loan offers and even the supporting documents (proof of income, credit history, etc.) you might be asked to provide. 

Cover all your bases. That way, you’re prepared for any request.

What Will I Need To Apply for a Home Improvement Loan?

You’ve done your research and the odds are looking good. Awesome! Now, it’s time to take the next steps. (You can do a lot of this online or over the phone, but some home improvement loans require in-person meetings.)

  1. Get a free credit report from all three bureaus: You’re entitled to one report per year. Many credit card companies include this service with a partner bureau. Take this opportunity to get free monthly credit reports online. 
  2. Check your credit history: It lists everything you’ve applied for, borrowed, paid back and may have defaulted on. You can also get credit reports from AnnualCreditReport.com.
  3. Calculate your debt-to-income (DTI) ratio: The calculation compares how much you owe to how much you make. If you’re up to the challenge and want to calculate this on your own, divide what you pay your creditors every month by your gross monthly income. Multiply the result by 100, and that’s your DTI. Otherwise, let our DTI calculator do the math for you! A general guideline is to keep your DTI below 36% to qualify for new credit. The lower it is, the better your chances of qualifying and getting beneficial loan terms. 
  4. Collect all income, financial account and personal information paperwork: Grab your latest pay stubs and a W-2 or two. (To see what other financial documents you’ll need, scroll up to “Do You Qualify for a Home Improvement Loan? Gather Some Deets” section.)
  5. Contact more than one lender for a soft credit pull: Some lenders provide instant prequalification information online. Use that information to compare rates, terms and lenders. If feasible, only do soft pulls at this point because they won’t affect your credit score. A soft pull will give you an idea of whether you qualify for a loan and what you qualify for. But sometimes a hard pull can’t be avoided. Oftentimes, the qualification for a mortgage or a HELOC will require a hard pull at the beginning.
  6. Select a specific loan option from the lender: Look for the options that match your desired interest rate and the loan amount you need to cover your home improvement project.
  7. Fill out loan applications with lenders of interest: Once you’ve picked out your favorite lenders, there is only one thing left to do: apply! 
  8. Get ready to rehab!

Put Down the Saw: Pick The Right Loan For the Job 

Getting the home upgrades you want requires some lender comparison shopping as well as deciding which home improvement loan best suits your decor dreams and your budget. 

Take your time. Research all of your options. Get the right loan. And maybe pick that saw back up – or get a contractor to do the work for you!

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