Home improvement loans can help you finance anything related to updating your home. Whether you need to make a necessary roof repair or want to give your outdated kitchen a refresh, home improvement loans can provide the funds to make it happen.
Want to explore your home improvement loan options? Here’s everything you need to know.
What Are Home Improvement Loans?
First things first, let’s clarify what exactly a home improvement loan is.
A home improvement loan is designed to help you tackle any major home expenses. With a home improvement loan, you can use the funds to remodel or renovate your home. You can use the funds to cover an update to one room or a full renovation. The funds can also be used for absolute necessities, such as repairing an old roof or replacing outdated plumbing.
Remodeling a home can be an expensive undertaking. In fact, the costs can easily run into the thousands. However, strategic home improvements can pay off in a big way by increasing the value of your home.
For example, let’s say you decide to remodel a bathroom. For every $1 spent, you can expect to increase the value of your home by 71 cents. When you consider that the average cost of a bathroom remodels runs around $20,000, according to Remodeling Magazine’s annual cost vs value report, the value of your home could increase by $14,200.
Home Improvement Loans, Explained
When you start to explore your home improvement loan options, you’ll likely run into personal loans first. Typically, personal loans are the go-to home improvement loan. That’s because you can use a personal loan to fund anything at all, including home projects of any kind.
If you decide to go with a personal loan to fund your home improvements, the process is straightforward.
Once you receive your instant offer and complete the loan application, you can receive your funds within a day. After you receive the cash, you can use it to fund your home improvements. With a personal loan, you’ll make regular monthly payments for the duration of the loan term.
However, personal loans aren’t your only option when it comes to home improvement loans. Since a home improvement loan is basically any loan that provides funds that can be used for your home projects, there are several other options. A few others include a home equity loan, a cash-out refinance, or a home equity line of credit.
Top Options For Home Improvement Loans
Let’s take a closer look at the most widely available home improvement loan options.
Personal Loan
Generally, a personal loan can be used to fund any type of expense. That includes home improvements!
The benefit of using a personal loan as a home improvement loan is that it is not attached to the value of your home. Unlike most home improvement loan options, an unsecured personal loan is not tied in any way to your home. With that, you will make regular monthly payments to repay the loan. But if you default on the loan, the lender won’t be entitled to claim your home as collateral.
If you have a good credit score, then a personal loan could be the right fit. Although you may face higher interest rates and short repayment terms than your other loan options, you won’t put your home at risk.
Cash-Out Refinancing
A cash-out refinance offers another opportunity to fund your home improvement plans. A cash-out refinance is based on the idea that you will build equity in your home as your mortgage term carries on. Every time you make a mortgage payment, the equity you’ve built in your home will grow.
If you want to pursue a cash-out refinance, you will tap into the value you’ve built in your home. With a cash-out refinance, you’ll receive cash in exchange for taking on a bigger mortgage that replaces your original mortgage.
For example, let’s say you’ve built $75,000 in equity in a home but still owe $100,000. You want to make $20,000 in renovations. At that point, you can pursue a cash-out refinance to pull out $20,000 and create a new mortgage agreement with $120,000 outstanding.
Once finalized, you’ll make monthly mortgage payments based on the new agreement. The major downside is that you will increase your debt burden because you’ve decreased the amount of equity you have in the home.
A cash-out refinance can be a good option to finance your home improvements without adding a separate monthly payment to your budget. But you will be further away from paying down your mortgage.
Home Equity Loan
A home equity loan is another way to fund your home improvement project. In some cases, a home equity loan may be referred to as a second mortgage. Essentially, a home equity loan allows you to tap into the equity you’ve built in your home by using it as collateral for a new loan.
If you have built a substantial amount of equity in your home, then a home equity loan could be the right solution. However, you put your home at risk when choosing this option. If you are unable to keep up with the monthly payments, you might lose your home.
Beyond the potential of losing your home, these loans are often associated with higher interest rates. Additionally, a home equity loan will add another monthly payment to your budget. Keep this in mind before moving forward with this option.
Home Equity Line Of Credit (HELOC)
A home equity line of credit (HELOC) is a final option to help your finance a home improvement project. With a home equity line of credit, you are essentially taking out a type of second mortgage. Through a HELOC, you can borrow money against the amount of equity you’ve built in your home.
With a HELOC, you’ll apply to tap into your home’s equity. If approved, you’ll have a draw period to pull out the month you need on an as-needed basis. At the end of the draw period, you’ll enter the repayment period in which you are required to make monthly payments. As a line of credit, you’ll be adding a second mortgage to your property. With that, you are placing your home at risk if you are unable to keep up with the monthly payments.
The beautiful thing about a line of credit is that you only have to tap into it if you need to. With that, it could be a good option for a home renovation project with a budget that isn’t completely nailed down. If things get more expensive, then you can borrow the funds you need. But you won’t have to borrow any funds that you don’t absolutely need for the project. So, you can avoid paying interest on “leftover” funds.
A HELOC will put you at risk of losing your home if you cannot repay it. Additionally, a HELOC is typically not tax-deductible.
Which Type Of Home Improvement Loan Is Right For Me?
As you consider which home improvement loan is right for you, take the time to explore your options. Since the loan eligibility and requirements vary by lender, it is important to shop around for the best fit.
You’ll need to determine which loan is right for your budget and your current financial situation.
Start by making sure that the loan terms fit your financial situation. For example, if you have a great credit score and minimal equity built in your home, then a personal loan might be the best fit. Although the home improvement loan rates might be higher for personal loans, it could be your best option. But if you’ve built a substantial amount of equity in your home, then a cash-out refinance or HELOC could be the better option.
The type of home improvement project you are tackling will also have an impact on the right loan for you. If you have a nailed down budget on a single big-ticket item, like a roof, then a one-time personal loan or cash-out refinance could be a good fit. But if you have a variable budget based on what you find under the bathroom tile, then a HELOC could provide the flexibility you might need.
No matter what, take the time to ensure that the monthly loan payments fit into your budget. The last thing you want is a loan that you cannot afford to repay.
How Can I Get The Best Home Improvement Loan Rates?
Home improvement loan rates will vary based on your individual financial details. Lenders will consider your credit score, income, and other details to provide a rate. If you have “good” credit scores and low debt-to-income ratios, then you’ll likely receive a lower rate. But borrowers with lower credit scores will likely face higher interest rates and limited loan options.
Beyond that, different types of home improvement loans will have different interest rates attached. For example, a cash-out refinance is less risky for the lender and that is reflected in a lower interest rate. But an unsecured personal loan comes with more risk for the lender, which will be reflected in a higher interest rate.
Take the time to shop around for the best deal for your situation.
How Can I Get A Home Improvement Loan?
Although the loan application process will vary based on the lender, here’s what a lender might require from you:
· Credit history and score
· Proposed borrow amount
· Renovation plan
· Proof of income
· Property type
· Down payment
· Home appraisal
Not every lender will require all of these documents. But taking the time to gather the information can ensure a smooth loan application process.
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