Home Improvement Loan
A homeowner’s guide
Perhaps you have owned your home for a few years, and though it has served you well over that time, you’ve decided that you would like to make a few repairs or other improvements. Rather than having to deplete your savings account, you could apply for a home improvement loan.
What are you dealing with?
Home improvement loans are offered by lenders to provide financing for home improvements or repairs. Both secured and unsecured home improvement loans are available. Before you consider taking out a loan, you should take some time to structure a plan outlining your needs and the goals that you want to accomplish.
Prior to applying for the loan, shop around and get estimates from at least two contractors. By doing this, you will be certain that you are not overpaying for the improvement, and the lender may request the written estimate or actual costs expected during the loan approval process. Keep in mind that you want the home improvement to increase the value of your home in excess of the loan you obtain. For example, if the cost of the improvement is $20,000, you want to make sure that your home value will increase more than $20,000.
Types of Home Improvement Loans
- First Mortgages: Often, homeowners don't have to look far to find a lender that will provide a home improvement loan. It is a good idea to ask your current lenders what terms and conditions they offer if you add a home improvement loan to your first mortgage. It's important to shop around, comparing rate quotes and making detailed evaluations. When you select this method of obtaining a home improvement loan, the loans generally are paid out in payments and may be paid directly to the contractor. In some cases, the borrower may receive the money but must prove the payments were made to the contractor.
- Home Equity Loans: If you have owned your home for any length of time, you most probably have a substantial amount of equity in it. A home equity loan is often referred to as a second mortgage.
There are two different home equity loans available. A home equity loan is a fixed-rate loan that is given in a lump sum, and it offers a fixed interest rate. This ensures that your payments are the same each month and are spread out over a period of time - usually 15 to 20 years but, depending on your lender, perhaps as long as 30 years.
A home equity line of credit is a variable-rate loan that is very much like a credit card, as it offers a revolving line of credit. It offers a "draw period," which allows the homeowner to borrow money against a limit determined by the lender for anywhere from 6 months to 10 years. During the "draw period," the homeowner can borrow money as needed, and as they pay it down or pay it off, they can "reuse" the credit. During the "repayment period ," the homeowner cannot borrow any money even though they may not have reached the preset limit. The repayment may last anywhere from 10 to 20 years, as determined by the lender.
Some homeowners prefer having the home equity line of credit option, as they feel they are in control of how much money they actually borrow.
- Refinancing Current Mortgage: Some homeowners who have some equity in their home, as well as high-interest consumer debt, may find that they are able to refinance their home, pay off all of their consumer debt and take some cash out for home improvements, all while reducing the amount of their monthly obligations. Often, this is one of the most preferred options because the homeowner only has one mortgage payment that is considerably less than making two separate payments.
- Unsecured Home Improvement Loans: An unsecured loan doesn't require you to pledge your home as collateral, nor do you have to have any equity in the property; however, the interest rates generally are higher than for conventional mortgages, and the limits are often lower.
- Government Grants: There are home improvement grants available that offer aid to low-income families to repair their current homes in neighborhood revitalization efforts. These grants are offered by the U.S. Department of Housing and Urban Development.
Before you apply for any type of home improvement loan, speak with a mortgage professional who will be able to explain all of the options available to you and answer all of your questions.
By Mortgage Expert
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