Home Improvement Loan Guide
Buying a house is expensive on its own, so it might seem almost impossible for you to afford to upgrade it. Whether you’ve recently moved into your home and are looking to remodel it, or you’ve owned your home for a long time and are looking to increase its resale value, you may not have the cash you need to afford the changes you’d like to make.
There are a few options you to consider to finance your home renovations, including borrowing the money through a home improvement loan. A home improvement loan is a personal loan that you take out to pay for your home improvement projects. These loans must be used only for repairing and improving your home; they cannot be used for other purposes, like purchasing a new home or refinancing your existing home.
It can be a fairly simple process to get a home improvement loan, but there are some things that you should consider when choosing between a loan or alternative means to pay for these projects.
Benefits of Home Improvement Loans
Home improvement loans have become popular among homeowners. Here’s why.
- Choose from a wide range of lending amounts. No two home renovation projects are exactly alike. Putting in new tile in the bathroom and putting in a whole new kitchen or adding a sunroom are three completely different tasks with three totally different price tags. Home improvement loans can vary from $1,000 to $100,000 or more. Not only are there numerous lenders out there who offer home improvement loans, but even the same lender is likely to be flexible with how much money you borrow.
- Find terms that work for you. In addition to offering a wide range of amounts, home interest loans also come in a variety of formats and terms. One type is a secured loan, meaning you have to stake a high-valued asset (usually your house) as collateral to your ability to pay back the loan. The benefit is that you’re likely to get more favorable terms and conditions. The downside is that, if you can’t pay it back, you could lose that valuable asset. You can also get a home interest loan that is unsecured, meaning you don’t have to put up any collateral that you could lose if you can’t pay the loan back.
- Secure a low interest rate. If you have a decent credit rating, there are loans available with low interest rates. Considering how many lenders offer these kinds of loans, many of them try to outbid each other by offering the lowest interest rates to compete for your business. Even if your credit isn’t where you’d like it to be, you still might be able to find a home improvement loan with an interest rate that works for you. Though, be warned: not all home improvement loans come with low interest rates.
- Get money fast. It doesn’t take long to find a home improvement loan and receive the money from it. Whether you apply through an online vendor or in-person through a bank or credit union, approval for these kinds of personal loans is usually efficient, and you can get the funds within a few days or even less. So if you need to submit a down payment to secure a particular contractor sooner rather than later, a home improvement loan likely would fit well within your timeline.
- Pay the money back according to your schedule. Depending on your personal financial circumstances and the cost of your project, it might take you a short amount of time to pay back the loan or a long time. Most lenders offer flexible payback timelines to accommodate your needs and preferences. If you’re taking out a small amount of money that you could pay back fairly quickly, no need to take out a loan that drags out the repayment process for years and years. You can find one that you could pay back within a few months. But if you’re borrowing a lot of money, you could also sign an agreement that allows you to pay back a small amount every month over a long period of time.
Advice for Getting the Best Home Improvement Loan
As we mentioned already, not all home improvement loans have favorable conditions. Especially if you have a relatively low credit rating, the first offer you get might not be the one you want. So here’s some advice to make sure you find a loan that works for you.
- Shop around. Chances are good you won’t find the perfect-fit home improvement loan the first place you look. It’s important to get a sense of the different loan conditions available to you before you sign up for one. If you have the luxury of time, then do your due diligence and meet with a variety of lenders to see what they can offer you. That way you’ll end up with the best deal possible, and you can sleep easy knowing that you didn’t miss out on a better one.
- Know how much money you need. It’s not uncommon for a home improvement loan application to be rejected. Since the loan must be used for a home improvement project, the lender might reject the request for funds if they don’t think the money will be used properly. That’s why it’s important to know exactly how much money you’ll need for the project and request that amount. A loan application for a precise amount demonstrates to the lender that you’re going to use the money on a specific project with defined parameters.
- Explain Why You Need the Loan: The stronger the case you can make for why you need the loan, the more likely the lender will be to approve your application. If you can explain what the project is and how it will increase the value of your home, the lender is more likely to be willing to work with you. They will see you as a more trustworthy partner who will almost certainly be able to pay back the loan on time.
- Understand your financial situation. Before beginning any conversations with a lender, make sure you know your credit score and the equity of your home. You can guarantee that the lender will have this information on hand, so it’s important that you do as well. If the lender has more information than you do, then the lender will have the upper hand in negotiating the terms of the loan agreement. So come prepared with as much information as possible and be ready to make the case for why the lender should work with you.
- Consider alternative options. Sometimes the best home improvement loan for you is no home improvement loan. Even though a home improvement loan can be affordable, they sometimes come with high interest rates and might take years to pay off. If there are other routes to finance your project that would be cheaper in the long-run and easier in the short-term, then it doesn’t make sense to take out the loan.
See if you can afford the project with your own money. That’s always the cheapest and easiest option, though it might not be feasible depending on how much money you have and how expensive the project will be.
You could also put the project on your credit card. If the cost to finance the project is within your credit limits, and the interest rate on your credit card is lower than the one you could secure through a loan, then using the credit card would be a better choice.
The Department of Housing and Urban Development also offers loans to homeowners interested in financing projects to upgrade their houses, and the terms of the loan are often more relaxed than the ones offered by traditional lenders. Do some research on the FHA Streamlined 203(k) program to see if you might be eligible for it. Loan amounts can extend to $35,000, so it could be a good option to afford even a high-scale project.
If you’re eager to do some renovations on your home but are concerned about the finances, don’t fret. There are plenty of options and lots of opportunities to secure a reasonable home improvement loan. Even if you have bad credit and can’t afford a good deal on a loan on your own, you could always ask someone with better credit, a friend or family member or business partner, to co-sign the loan agreement with you. With the backing of someone with a strong credit rating, the lender might be more willing to bring down the interest rate to a level that you can afford.
Regardless of what kind of project you’re hoping to pursue, there’s likely a home improvement loan out there that will work for your situation. So don’t put off refinishing your basement and upgrading your patio or putting in that screened-in porch you’ve always wanted. Do your homework and start researching lenders that give out home improvement loans. There are likely plenty in your area and even ones online who offer competitive, affordable rates.
Assumes 15% APR on $10,000 in debt and a 10 year loan