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A home improvement loan is meant to help you finance renovations in your home. It is now easy to get a home improvement loan, considering the emerging online loan shopping options. Many home improvement loans are offered to borrowers with good credit scores. However, you will also find options for borrowers with fair credit. Here is a look at the various home improvement loan options and what is required to get one.
Securing a personal loan is faster than most loan options. Many of these loans have terms that are capped at between five to seven years. Personal loans are recommended for borrowers who have a good credit score and can secure a good rate. These loans are suitable for minor to average renovation projects.
One thing about what to know to get a home improvement loan is that with personal loans you do not have to offer collateral. The lender will not consider any information regarding your home. Instead, the lender will base their decision to lend you money on your income and credit score. This is the best option for you if you do not have a lot of home equity or do not want your home to act as collateral for your loan. The consequence for failing to repay a personal loan on time is that your credit score will drop.
Home equity line of credit
Home Equity Line of Credit is commonly used to finance home improvement. The money you are given from this loan is derived from your equity. Equity refers to the value of your house minus the money you owe on it. This type of loan is like a second mortgage because your house will act as collateral.
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The draw period for HELOC loans is 10 years. During this period, you can choose to use all or some of the money you are approved to get. During this draw period, you are required to submit interest-only payments.
Because you do not have to pay the principal during the draw period, HELOC is most suited for homeowners who plan to sell their home in the near future. In this case, the principle will be subtracted from the home sale. A HELOC loan affords you flexibility when you are not sure how much money you will pay for renovations and whether or not you want to sell your home. This loan is also useful if you are executing projects in stages like building an extension to your home.
Home equity loan
A home equity loan mainly differs from a HELOC in terms of interest rates. In this type of loan, the borrower is given the full loan amount upfront with a fixed interest rate. Based on the loan terms, you may be eligible to pay your debt in up to 30 years.
Since home equity loan interest rates are fixed for the entire duration of the loan, they are suited for homeowners who intend to pay off their loan over an extended period of time. These loans are suited for borrowers who only have one home improvement project.
A cash-out refinance helps you refinance your mortgage. The lender will give you the amount of money you want to cash out against your existing mortgage. Therefore, your loan will include your initial mortgage plus the amount of money you have received and any other costs that have been rolled into the loan.
A cash-out refinance affords you the chance to fund your home improvement project over a long time. The main upside is that if the mortgage rates have gone down since you bought the house, you pay a lower rate on your entire debt. The main downside with cash-out refinancing is you will have to pay closing costs on your full loan. With a HELOC and home equity loan, closing costs apply to the money required for the renovation.
Considerations to make before getting a home improvement loan
Identify your needs
Home improvement loans are used for a specific maintenance or home upgrade projects. For example, you can use your loan to renovate your bathrooms and kitchens. Simple kitchen remodels are capable of a significant return on investment. One of the best uses for a home improvement loan is a home addition. These projects not only make your house bigger, but they also raise the value of your house.
Therefore, when applying for a home improvement loan, the likelihood of gaining approval depends on how well you explain to your lender the specific need for the money. For example, if you want to renovate your bathtub, say that to your lender. The better you explain your case, the higher the chance of getting approved for a loan.
Request for a specific amount
You have a better chance of getting a loan if you do not ask for too much money. Instead, focus on the exact amount required for the home improvement project. Lenders prefer lenders who are thorough in their research and who provide good estimates on the funds for the improvement project.
Check your credit
Many home improvement loans are granted based on your credit score. For these loans, you need to review your credit history to ensure it is good enough for loan approval. Confirm whether there are any flaws on your credit report that will negatively affect your loan application.
Check the equity of your home
HELOC and home equity loans are granted based on your home equity. It is advisable to know the value of your home, in terms of equity, when borrowing these types of loans. If you are unsure, you can ask a professional to help you determine your home equity and the loan amount you are eligible for.
Home improvement loans are convenient for making major upgrades to your home. These renovations can add value to your home through additions or even fix annoying issues like a drainage problem or roof replacement. You are spoilt for choice when getting home improvement loans. However, it is good to bear in mind your goals and the best loan solution based on your financial condition.
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