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Home Improvement Loans: What You Should Know
Home renovation projects can be expensive, whether you're moving into a new home or giving your existing house a makeover. You may have to find a way to finance your project if you need more cash to pay for urgent house repairs or a significant change that your house demands. In this situation, you can think of getting a home improvement loan.
To simplify things and help you make a better decision, here's our guide to learn more about home improvement loans.
What is a Home Improvement Loan?
A "home improvement loan" is an unsecured personal loan intended to finance house repairs and improvements. Since it's usually an unsecured loan, you won't be required to put up an asset, like your vehicle, as collateral when you get a home improvement loan. These loans can allow you to borrow from $1,000 to $100,000, depending on the lender and your place of residence. Most house improvement loans have fixed interest rates with monthly payments.
How Does It Work?
Like any other personal loan, you'll typically receive the loan amount up front when you take out a home improvement loan. You can then use the funds for almost anything related to your home renovation or improvement.
Your repayment term starts as soon as you get your funds. You'll pay back the principal and interest on the loan during this time with regular and fixed installments. The cost of a home improvement loan will include the total amount you pay as interest and any additional charges like origination fees that some lenders may charge.
The funds from your loan cannot be used again, unlike a credit card that allows you to reuse your funds as you repay your balance. You must apply for a second home renovation loan if you use all the funds and need additional financing.
How Can I Use a Home Improvement Loan?
You can use a home improvement loan to finance almost all your home renovation & improvement projects. Here are a few home-related expenses that homeowners commonly fund using a personal loan for home improvement:
- A room addition or upgrade
- Emergency home repairs like a leaky roof or furnace replacement
- Adding a new deck or patio
- Bath and kitchen upgrades
- Constructing a new garage
- Buying new furniture
- A swimming pool installation
Depending on your financial need and circumstances, you might find a personal loan for urgent home improvements more beneficial than using your credit card or home equity. Whether you need help winterizing your home or preparing your house to save money in spring, you can use a home improvement loan.
Pros and Cons of Home Improvement Loans
Like any other form of credit, loans for home improvements have their fair share of pros and cons that you should know before applying for one.
- Since most home improvement loans are unsecured, you won't have the risk of losing any of your property if you default on your loan.
- You can consider and have a better chance of getting a home improvement loan if you have little home equity.
- It helps you to pay for a range of renovation, maintenance, and repair work for homes.
- These loans facilitate quick funding with an easy application process. Once approved, you can get your funds on the same day or faster than you could with a HELOC or home equity loan.
- Personal loans' fixed interest rates feature helps you take advantage of fixed and predictable payments.
- Home improvement loans could be costly due to their unsecured nature.
- Compared to other forms of borrowing, home renovation loans have comparatively short repayment periods. You can choose a home equity loan if you require additional time to repay the loan and have equity in your house.
- Charges like origination and late fees, if applicable, may raise the total cost of your home improvement loan.
What Are the Types of Home Improvement Loans?
Here are the five most popular lending options you'll probably hear about when funding home improvement projects: Personal loans, home equity loans, home equity line of credit (HELOC), Cash-Out Refinance, and Credit Cards.
You can use a personal loan to pay for any expense, including house repairs. When you choose an unsecured personal loan, your loan eligibility is not dependent on the value of your home, which is a benefit for homeowners or tenants, too.
Before choosing a lender for a personal loan, compare loans from several lenders because personal loans might have high interest rates and costs. Some lenders allow you to get prequalified for a personal loan. You can get prequalified with multiple personal loan lenders to ensure you get the best offer. Once you apply, many lenders offer same or next-day application approval, and you can get your funds sooner than you thought.
Home Equity Loan
A home equity loan is another excellent option to consider if you're trying to finance home repairs. A home equity loan offers a way to use the equity you've built up in your home over time as collateral to borrow funds. Though you can expect to pay a lower interest rate since you're using collateral, you risk losing your home if you default on your payments. Homeowners who know how much they need to borrow and have at least 15% equity in their home can consider a home equity loan as their best option.
Applying for a home equity loan typically requires an appraisal, so the application process may take longer when compared to personal loans. On approval, home equity loans provide you with a lump-sum amount that you can use for home-related projects and needs.
Home Equity Line Of Credit (HELOC)
Also referred to as HELOC, a home equity line of credit is a revolving line of credit that can be secured using the equity in your home. Unlike a home equity loan, you can withdraw funds for home improvement projects as needed rather than getting all the borrowed funds in a lump sum. Due to this, HELOCs work best for those planning more significant home renovation projects and who still need to determine the precise amount of cash they will need. However, you might overspend or borrow more money than you need when you don't apply for a fixed amount. In addition, you could also lose your house, which you've used as collateral, if you don't make payments against your HELOC.
Knowing the difference between a line of credit and a loan can help you better decide about getting a HELOC. Once you're sure, find lenders that fit your needs by comparing their loan requirements. Choose the right lender and apply once you have a decent idea of the rates and terms available.
In a cash-out refinance, your existing mortgage is paid off and replaced with a new, larger one. That lets you withdraw the difference between the two mortgages and use that cash for home improvements. Your home's equity will determine how much money you can access through a cash-out refinance. Your loan-to-value, or LTV, ratio should be 80%, the maximum amount you can withdraw from your house's value.
Your mortgage terms will change if you refinance, which could result in a higher interest rate. Therefore, always check if the withdrawal amount is worth losing your current rate. Ultimately, ensure you can afford your new mortgage payments so you don't risk defaulting and possibly losing your house.
Consider using a credit card for your smaller home improvement projects. Credit cards are a great financial tool with a credit limit that you can repeatedly use as you pay off your balance. Moreover, you are only charged interest on the unpaid amounts at the end of your payment cycle.
With a credit score of 670 or more, some credit card providers may offer you a 0% APR credit card. With these cards, you can enjoy the benefit of 0% interest for six to twenty-one months. If you use a credit card with 0% APR to finance your home repairs and repay the balance before this introductory period ends, your funding could be interest-free.
When is a Home Improvement Loan a Good Idea?
Now that you know your options for home improvement loans, you should also compare the fees and penalties attached to each one before choosing. Whether or not you'll be able to handle the burden of new credit along with your existing ones also affects your decision to apply for a home improvement loan.
Loans for home improvement may be wise if you're dealing with unavoidable costs that could negatively affect your daily life, like a flooded basement or termite damage. At the same time, you can apply for a home improvement loan to finance large-scale projects such as energy-efficient upgrades or adding a swimming pool.
Things to Keep In Mind Before Taking Out a Home Renovation Loan
When considering home improvement loans, you can keep the following points in mind to not regret your decision later:
Your remodeling goals
The maximum amount you can borrow using a home renovation loan can vary from lender to lender and state to state. That is why reviewing your project and determining the expected costs before submitting a loan application makes complete sense. Based on your financial needs, you can compare and choose the loan option to help you borrow the appropriate amount of funds.
You receive your loan amount in a lump sum, meaning you still need to quote a number on your home improvement loan application. Determine how much money you'll need to borrow by calculating the cost of your home renovation project. Only borrow what you need because you'll be paying interest on the entire amount you borrow.
Some lenders may not require you to have a good score to be eligible for a personal loan. However, having a good or excellent score can increase your loan options. You can check your credit score with websites that provide free scores. That can give a better picture of your prospects of qualifying. A score of at least 670 is preferred, but a score of at least 720 will result in better terms.
How Do You Apply for a Home Improvement Loan?
Applying for home improvement loans can be simple, inexpensive, and straightforward. While each lender has a different procedure, here are the general steps to apply for a home improvement loan that you can follow:
Check your finances
Realizing where you stand in your financial life is the very first step. You can begin by knowing your credit score for free from online credit score providers. It's also vital to determine the cost of your home renovation project to evaluate how much you'll need to borrow. That will help you estimate your cost of borrowing well in advance.
Compare lenders and loan types
Your loan's annual percentage rate can vary based on your chosen lender. In addition, they might consider various factors like your credit score, income, and state of residence to determine the rate of your loan. The best loan you can get may only sometimes have the best rate you can get. Before applying for a loan, it's crucial to examine several lenders, paying particular attention to loan amounts, fees, and customer service alternatives.
Gather your loan documents
Gather the necessary documents once you've decided on a lender. These include W-2s, pay stubs, residence verification documents, and financial data.
Complete the loan application process
Some lenders allow you to begin your application online, on call, or in person. You can choose the appropriate way for your circumstances. After you apply, many lenders will make a lending decision within a few minutes, a day, or two. When you get the funds, you can use them for your home improvements and start making the repayments.
How Much Can I Borrow?
Fortunately, the equity you have in your home is open to the amount you can borrow. That's because home improvement loans do not use your home as collateral. The individual lender often determines the amount you can borrow based on their criteria. Home improvement loan lenders usually provide loans in the $1,000 to $50,000 range, but some might allow you to borrow up to $100,000.
Is This Loan Right for Me?
Here are some of the scenarios when home improvement loans can seem like an ideal option:
- When you don't have existing equity in your home
- When you need a smaller amount urgently
- When you prefer predictable repayments
Suppose you intend to use the equity you've built in your house for another essential purpose. In that case, a home improvement loan is a better option. Some people rely on the value of their homes to help pay for major expenses like college fees, fund their start-up business, or pay off other debts. Ultimately, a home improvement loan can enable you to support your home repairs or renovations and allow you to use your house's equity to cover other crucial expenses.
Choosing a Home Improvement Loan Option
Don't rush! Take the time to research, think, and analyze your options as you consider a home renovation loan. The comparison is crucial because every credit option has different eligibility, terms and conditions, and requirements. Some lenders may also set their own rules over the state laws for a particular loan. Finally, deciding which loan is best for your budget and present financial status rests with you after carefully considering and reviewing all the factors.
For instance, you might have a good reason to get a personal loan for home improvements if you have excellent credit and little equity in your property. On the other hand, if you've already accrued a sizeable amount of home equity, a cash-out refinance or home equity loan might be a better choice. However, a HELOC can offer the flexibility you require if your budget is more unpredictable and subject to change as you start renovating your home.
Moreover, remember that various home improvement loans will have varying interest rates. A lower interest rate, for instance, will reflect that a cash-out refinance is less risky for the lender. A higher interest rate will compensate for the additional risk posed by an unsecured personal loan to your lender. Knowing the cost of your loan will help you gauge whether you'll be able to manage the loan payments or not. The last thing you want as a home improvement loan borrower is to take out a loan you cannot afford to repay and end up inviting new financial problems.
There's no "one best way" to finance home renovation projects. The option that best suits your financial circumstances and goals will be the one you should choose at that particular time in your life. If you need a smaller amount, want to reduce your borrowing risks, and prefer regular payments, using a personal loan for home upgrades may make sense.
Home improvement loans are available from various sources, including banks, credit unions, and online lenders. All in all, whichever type of loan you choose to pay for your home improvements, ensure the money goes in the right direction.
Harita Solanki is a passionate advocate for personal finance and believes in empowering individuals to take control of their financial lives.
Her expertise covers a wide range of personal finance topics, including budgeting, saving, credit, debt management, and retirement planning.
With over six years of dedicated experience in the finance industry, Harita has helped countless readers of CASH 1 Loans make informed decisions and achieve their financial goals.
As a dedicated writer, Harita has contributed to numerous financial publications, sharing her knowledge and insights to help readers navigate the complexities of personal finance.
Her writing style is approachable, concise, and tailored to the needs of everyday individuals looking to improve their financial well-being.