Owning a home can be one of the most fulfilling accomplishments in our lives. Work hard, save up and slowly begin transforming a house into your own home. It may seem intimidating but there are several ways to take that pressure off. One concern is as the house ages, it will begin requiring repairs, home improvement and some of those can be costly. Luckily, there are financing options such as a home improvement loan.
This guide will go through this type of loan and provide you with information needed to make an informed decision.
What Are Home Improvement Loans?
Home improvement loans are just that: loans used to make improvements in your primary residence. This could be anything from a new roof, kitchen remodel or an addition to your home. The idea with a home improvement loan is you can make the improvements and they will potentially increase the value of your property. At the very least, it gives you an affordable financing option to complete various projects around your home.
How Does a Home Improvement Loan Work?
Home improvement loans are a bit more involved in that they require additional information beyond the normal name, address and proof of income. To start, the application process requires all the typical information, but also will likely require some sort of appraisal of your home. The reason for this is a home improvement loan, or second mortgage, uses equity you’ve built up in your home to decide on the loan size. For example, if you have a home worth $100,000 and you’ve paid $20,000, the lender may only lend 90% of the home value, meaning you can apply for a loan worth $10,000.
Another item to keep in mind is a home improvement loan can come as a line of credit or installment loan. This is mostly up to the borrower to decide, but one can be treated like a credit card while the other is a lump sum disbursement you will begin repaying right away, even if you elect not to use the cash.
Once you receive your funds you can begin making upgrades or repairs to your home.
If you have enough equity in your home, it might make sense to research a home equity loan or use a HELOC for home improvement projects. You’ll likely pay less by using your home’s equity. The average cost of a personal loan for home improvement projects ranges from 10.3% to 32% APR.
Reasons to Get a Home Improvement Loan
Reasons you may need a home improvement loan can vary widely, but the most obvious is to make improvements to your primary residence. While small repairs are easy to budget for, more extensive repairs such as a new roof or driveway can be a bit more costly.
Home improvement loans tend to have competitive interest rates and given the current low rate environment, it won’t cost all that much to borrow. However, this all depends on your credit score. Also, it may be more beneficial to get a home equity loan or HELOC.
Another reason you may want to have a home improvement loan is to simply have cash on standby for something impending.
You may know that something could give out or need replacing, and you may have the money, but you want to play it safe and have a large lump sum just in case. You’ve worked hard to build equity in your home. You can think of it as putting your money to work improving your asset. Another advantage to a home improvement loan is the cost of these types of loans are very competitive. For a rough estimate, you can look at a 30-year mortgage rate and assume you’ll be in the ballpark.
On top of that, home improvement loans tend to be rapid over several years, meaning you can limit the stress on your cash flow when making necessary updates.
A main disadvantage is you are taking away equity in your home. You’ve worked hard to build up your position and know you have a 2nd lien holder who is in place. While this may not be too concerning, if you go to sell your home that means you’ll make potentially less on your investment. This is a great way to continue upkeep on your primary residence and ensure you retain and even build its value. These are long-term notes but can typically be repaid early with no penalty. It’s important to shop around if you’re considering this loan because given the current rate environment, lending is very competitive.