One of the most worrisome parts of being a homeowner is having to make spur of the moment home repairs and upgrades. There’s good news, though, there are loans available for homeowners, specially made to help with those upgrades.
Home improvement loans require no collateral and are financed just like your home. Acquiring a home improvement loan is done through a bank or credit union. Home improvement loans are for home upgrades, renovations, and additions.
While they may seem straightforward, home improvement loans can be hard to navigate for the new homeowner or loan seeker. If home improvement loans are something that you’ve been curious about, then this article is for you. Keep reading for all the ins and outs of home improvement loans.
Home Improvement Loans: What are They?
A home improvement loan is just a personal loan to use for repairs to the home. The inclusion of home only shows the intention of using the money for upgrades to a home. If there’s a natural disaster or fire, using one of these loans is a great option.
Home improvement loans can be secured or unsecured. A secured loan is one like seen in a home equity line of credit (HELOC) or a standard home equity loan. With some loans, your home becomes the collateral, and the bank will foreclose just as in a defaulted mortgage.
The significant difference between a home improvement loan and a HELOC is that a HELOC ties to the equity in your home. Capital builds after a certain number of payments are made that would be equivalent to the loan you seek. Having ownership is something that takes time for new homeowners and makes it hard to get one of these loans.
Repaying home improvement loans is done monthly or in payments, just like all other loans. Shopping around to find the right mortgage is critical work that should be undertaken with patience and common sense. Trusting a local credit union isn’t a bad idea because the money goes right back into the community.
Most home improvement loans come with fixed rates and lower payments. They are also better than credit cards for this reason.
Having a loan payment that changes the interest per payment is a thing of your darkest nightmares. There is no way to prepare for it in a budget, and falling behind will destroy your credit and potential for further purchases.
How to Use a Home Improvement Loan
A home improvement loan is like a general loan, and the money is used for whatever is needed. If the remainder of cash leftover from the investment is enough to pay the credit cards off, then do it. If the balance is enough to dig the pool the kids have always wanted, go for it.
Using loans for home repair is the most common way to spend the money, though some spend on upgrades and techniques to make their home more enjoyable. A hidden benefit behind most updates is improving the value of the house. A second bathroom or sunroom can add thousands to a home’s list price when it goes back onto the market.
How to Qualify for a Home Improvement Loan
A home improvement loan will require a decent credit score, above 660, at least, as well as several other factors. The other factors that loaners will look at during a home improvement loan application are:
- Education history
- Personal information
- Annual income
- Loan history
- Savings and investments
- Loan amount
Banking is a complicated mix of finances and investments that will make a novice feel overwhelmed and lost. Paying close attention to how the bank operates and having the information they need on hand makes your time there go much smoother for you and the banker.
What Paperwork You’ll Need to Have on Hand
Before you rush out of the house or start searching the web, there are some critical pieces of information that you’ll need. To make it easier on yourself, track these things down before getting started.
If there are large amounts of student loans, is going to be the big one here. The cost of education has skyrocketed in the last 20 years, and most younger homeowners have a mountain of debt.
Lending agencies will always need to know your personal information, like address and contact info, to keep up with payments.
Personal information is also valuable to collection agencies in the event you default on the loan; they can file proceedings to seize the property and proceed with their court case.
Yearly salary is often the most critical item on the list. Once the lender understands the overall financial gains, they can devise if you have the funds available to return their investment.
Doctors and lawyers who have high incomes are almost always approved for upgrades and loans for their homes, while those just starting may have to tighten their waistbands to afford an extra entryway for their disabled child.
Often, when a person’s finances begin to circle the drain, they are forced to take out multiple loans to keep themselves afloat. The bank will check to see if this situation applies before allowing a loan.
While banking isn’t in the business of caring what you do with the money, they will care about how it comes back. If the lenders sense a financial problem, they will reject the loan outright.
Savings and Investments
Those with savings and investments will have them checked, in order to determine if other collateral can be taken instead of the home.
A thorough accounting of your portfolio will give the bank all the information they need to justify releasing the loan to your accounts.
The loan amounts that are needed will be something else the bank will require. If the home is worth $525k and the loan request amount is $500k, they might want to know why. Banks need to protect the money given to them because they work with investors and tiny bits of loans from across the country. Giving someone home value for home improvements isn’t good business.
Once someone crunches the numbers, they feed them into an algorithm that determines your loan worthiness. Individual companies have different numbers that go along with the algorithm.
However, they generally rely on the outcome to determine if all the bases are covered. Once the banker gets the information they wanted, the loan you requested will go through.
Ways to Finance Home Improvement Loans
The best way to get a home improvement loan is to apply for a general loan from your bank or credit union, but that isn’t the only way. There are several ways to get the money you need to add a new addition to your home.
A large part of the lending business stands on the fact that people need money to repair their homes. The best ways to get financing for your project are:
- Personal loans
- Home equity line of credit
- Second mortgage
- Refinance your mortgage
- Government loans
- Credit cards
One of the most accessible types of loans to find is the personal loan. They are in places all over the internet and strip malls across the country. These places have a high-interest rate for those with weaker credit, so be prepared.
With the same information you provide at your bank, the personal loan process begins, so you can get what you need for home improvements.
Home Equity Line of Credit (HELOC)
A HELOC is a handy way to keep a steady stream of money coming to make repairs and upgrades over your loan period. They have a much lower interest rate than personal loans and pair with your mortgage rate.
The major downside is that if you default on the loan, your home will be forfeit. There is also a level of equity needed before you qualify for one of these loans.
A second mortgage is a relatable term for a home equity loan. A lump sum of money is received, and the mortgage holder makes regular payments until the agreed-upon amount is paid in full.
The interest rate for a second mortgage can be higher than other loans, but it saves the fear of fluctuation in rates you get with other investments.
Refinance your Mortgage
Another excellent option for money is a home refinance. You replace your current mortgage with a new one, and if there is a difference, the money is yours. This extra money can add an addition to the home or put it into an account for a rainy day. Check interest rates before refinancing.
If you are a Veteran or a home buyer with little or no equity in the home, a government loan could be a great place to start. There are loans available through HUD that can be up to $25k for home improvement with no equity.
Veterans have options through the VA to purchase and upgrade a home. If the Vet has disabilities that require home upgrades, there are grants for this as well.
The riskiest route to take is to leverage all your home repair budget into your credit cards. It is dangerous because the interest rate on some cards is variable.
A variable-rate card will be hard to fit into your budget as you don’t know precisely what the bill will be each month. If the company can guarantee a rate that is under 3%, the federal interest rate for a home loan, it is more than likely a scam.
The Pros and Cons of Home Improvement Loans
Making upgrades to the home is something that most homeowners need to do over their time in the house. It can be something as simple as an extra space in the driveway or as elaborate as a multi-room addition.
Securing the loan is just the first half of the problem, as getting a personal loan can have several pros and cons. The advantages of getting a home improvement loan are:
- Lower interest rate
- Applying is quick and easy
- Funding is available quickly
- No up-front fees or charges
- Most Loans are Unsecured
Lower Interest Rates
The interest rate on a personal loan is much lower than a payday loan or piling up credit card debt. Being forced to put home repairs on a credit card can be disastrous to your credit.
A low-interest loan gives you much longer to whittle down the balance and takes less bite from the wallet. Interest is great because it can be written off on your tax return. This crucial for someone on a fixed budget or with limited access to cash.
Applying is Quick and Easy
The process of applying for a loan is much easier than a refinance or second mortgage. Today there are several places online to get a personal loan that could have the money in the account within the day.
Online banking has made the industry boom over the last several years. People can apply at any time and get their money as if they entered the local branch.
Funding is Available Quickly
A refinanced mortgage or second mortgage can take months to reach a closing and receive the money. Circumstances may mean that you don’t have that long to wait.
A personal loan is much faster and can see the funds deposited into the account within the week and sometimes faster. With your banking information available to the company, they will write an e-check or send a paper check that can be added to an account digitally.
No Upfront Fees or Charges
A refinance has several moving pieces that all must get a bite out of the monetary pool. All these bites leave little for you. When shopping for a loan, make sure that there are no upfront fees or charges.
The budgeting for the project should be in mind when thinking about price as well. When the costs are listed during the final process, there is still time to back out. Don’t get placed in a situation to lose your residence.
Most Loans are Unsecured
An unsecured loan means that there has to be no collateral. Collateral is something of value that the bank or loaning agency can recoup if the credit goes into default. Large items like the home and properties can be taken as collateral.
Often a local lender will take whatever they can get as a means to keep their business afloat. These lenders are likely to be small-time and can only lend less money than a large corporate bank.
The Cons of Home Improvement Loans
The housing market is always in flux. The value of properties and houses can change instantly, and the same goes for personal loans.
Be wary of the pitfalls of taking loans and know what to look for when you start. The cons to getting home improvement loans are:
- Interest is nondeductible
- Return on Investment Losses
- Potentially Higher Interest Rate
Interest is Nondeductible
When you have a home, you can deduct the interest from a home equity loan or mortgage and write the balance off, as long as it is under $750k. A personal loan cannot be written off.
When you write something off, you get that money back if you have taxes to pay, or you could receive a refund. A refund could be used as another way to offset the extra payment that would come with a personal loan.
Return on Investment Losses
If there are upgrades added to the home that don’t add value, you will have a loss. This loss is called a return on investment loss. The interest that you pay on these loans is going to drive this loss down even farther.
Not to mention that a large portion of the population that installs upgrades in their homes doesn’t recoup the money. When upgrading, understand that a loss is going to be in the cards.
Potentially Higher Interest Rate
Refinancing at the right time can save you thousands. If you have a personal loan, the interest rate could be three or four times what a bank can give you. The same goes for a home equity loan because the interest you take on that loan could be much lower than the personal loan.
Having a high-interest rate can sap more money from the budget over the long run than a risky short-term loan. Read the fine print and know what the terms are before agreeing.
The pitfalls and zeniths of homeownership provide several problems that can make or break your family. Budgeting for repairs and upgrades could be a problem for those with a fixed income. Taking personal loans for home improvements is a smart solution that will provide the funds you need while not risking your house in the balance.
Before beginning the search for a home improvement loan, take the time to learn what is expected and how the process works. A reputable lender will have no hidden fees, and the rates will be close to the industry standard. Your local bank should handle home improvement loans as they are a trusted source with the betterment of the community at heart.