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Home Improvement Loans 101: What Every Homeowner Should Know

Written by Posted On Tuesday, 15 May 2018 17:02

As a homeowner, you have made a considerable investment in your home. You are constantly presented with opportunities to make home improvements to either add to your enjoyment of your home or add to its value. In many cases, both can be accomplished with the same improvement, such as finishing a basement to add living space to your house. This will benefit your family now and let you sell the house for a higher price down the road.

Home improvement projects are not cheap. For example, a common improvement that many homeowners undertake is to remodel their kitchen. According to Life Hacker, the average cost of this home improvement is almost $20,000. If you are planning to remodel a number of rooms, you could be looking at costs of between $50,000 to $100,000. While you hope to recoup these investments when you sell your home, you need to find a way to finance the work now and worry about resale value at a later date.

This is where home improvement loans come into play. There are a number of different options available that may be more attractive to you based on your current financial situation and the amount of equity that you have in your home. Let’s take a look at home improvement loans and point out some factors that you should be aware of before you proceed in obtaining financing for your project.

Refinancing Your Mortgage

A logical first step is to consider refinancing your current mortgage. There are a number of reasons why this may make sense when looking for home improvement financing. This is called a cash-out refinancing where you will refinance your current loan for more than you still owe, keeping the difference for your home improvement project. The best place to start when looking for this type of financing is with your current mortgage holder.

There are pros and cons to this type of borrowing. You can obtain a large sum of capital at one time to handle big projects. By insisting on a fixed-rate loan you can avoid the uncertainty of the adjustable rates that often accompany a home equity line of credit. The cons are that your rate may be slightly higher than the market rate, according to bankrate.com. You also have to pay closing costs, and the process to obtain the refinancing can be as time-consuming as your original mortgage application.

Home Equity Loans (HEL)

The amount of money you can borrow with a home equity loan is based on the equity that you currently have in your home. If approved you will get all of the money up front, and have a repayment term of 15 to 30 years. You should also get a fixed-rate loan so you have no surprises lurking in the future.

An HEL is a good choice for large projects. The drawback to this type of financing is that your home is the collateral, so failure to repay the loan may mean losing the house. There may also be prepayment penalties which make it harder to pay your loan off early if you are in a position to do so.

Home Equity Lines of Credit (HELOC)

An HELOC is similar to an HEL in that the money you can obtain is calculated with the equity you have in your home in mind. There are major differences though, and in some cases, one may work better for you than the other.

When you are approved for an HELOC you will be advised of the amount that you can borrow against your home’s equity. You do not need to take all of this money at one time. Rather you can withdraw it as you need it and a payment schedule will reflect the amount that you have taken so far. This can be a more flexible way to finance that an HEL, but you will likely pay an adjustable rate which makes future budgeting more complicated.

Personal Loans

A personal loan that is based solely on your individual credit score and history is another option when searching for home improvement financing. This might be the best way to go if you have a good credit history but have not accumulated much equity in your home yet.

The terms of personal loans can vary, but in most cases, there is no prepayment penalty, which may be an important factor when making your financing decision. A drawback is that you will not be able to borrow as much on a personal loan as you would be able to by using your home’s equity as collateral. 

FHA Loans

The Federal Housing Administration offers several loan options such as Title I and 203 (k) loans for homeowners who lack equity but need to make improvements to their dwelling. There are restrictions on these loans and the application process can be lengthy, so you need to thoroughly investigate the constraints before you apply. You don’t want to wait several months for a response on a loan that you were not qualified for and where you had no chance of being approved.

Diversified Loan providers

There are loan providers who can help you find the right type of loan for your home improvement project. A popular option are Hearth loans, because the company will work with you to determine which type of loan is best for your individual situation. Working with a company like this can streamline the process of looking for a loan and help you understand and compare your options.

Hearth can help you delve into the details and differences between the way an HELOC, HEL or personal loan will affect your current and future finances. They offer online tools that help you comparison shop for your financing to ensure that you choose the right type of loan. They can get you some types of financing in as little as two weeks, which can be an important factor when planning your project.

Conclusion

These are some points to consider when searching for a loan to help you make improvements to your home. Take advantage of all the resources available to you, and you can find financing that will allow you to upgrade your home in a financially responsible way.

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