Your home is likely your largest investment, and keeping it in top shape is important to protect your investment and its resale value. Whether you need to make major repairs, additions, remodel, or would just like to update the look of your home, financing home improvement projects doesn’t have to be difficult. Learn more about how home improvement loans and renovation loans can help you.
How to get a home improvement loan
Before you begin
Know your numbers. Generally, it is easier to get a home improvement loan than it is to get a mortgage, but the loan officer will still look at your debt to income ratio to ensure you have enough money to meet all your monthly payments. Lenders will also look at your credit score and a home appraisal if you are doing an equity loan.
Plan for the future. If you are planning to sell your home soon, a home improvement loan may not be the best option. It can help you make the upgrades you’d like, but the more money you have tied up in loans, the less you’ll be able to take away from a home sale. Having an independent appraisal done and perhaps an evaluation by a Realtor before taking on a home improvement project may be beneficial.
There are three main financing options for home improvement projects. The best loan for you depends on the amount you need to borrow. Estimate the costs of the project, or have several contractors give you a bid so you have a good idea of how much your improvement will cost. If you are doing the project yourself, add a 20-40 percent cushion. If you are working with a contractor, add 10 percent for unplanned expenses.
$3,000-$5,000: For relatively small repairs, an unsecured personal loan or personal line of credit may be your best option. These typically have a fixed rate, a fixed term, and does not tie up the equity in your home.
$5,000-$10,000: For more significant repairs or renovations, a secured equity loan is the most common option. You can receive equity out your home through a home equity loan or a cash-out refinance. Your lender will be able to walk you through the interest rates and fees to find the best option for you, but in order to use any of these options; you must have more than 20 percent equity in your home to have any funds available for use.
More than $10,000: If you have major renovation needs, a home equity line of credit might be your best option. This gives you more cash depending on your eligibility, and can be flexible between a fixed rate or a variable rate.
FHA Title I Loan: This is a program available through a wide range of lenders and is authorized by Title I of the National Housing Act. The amounts and interest rates are negotiated case by case. These loans can be used for upgrades that make a home more livable including built-in appliances, improved access for the disabled and energy conservation improvements, but not for luxury upgrades like swimming pools.
How do I get a home improvement loan?
There are two types of home improvement loans you should know about. The first type of loan requires a down payment, while the other use your home equity as collateral.
Typically, those borrowers looking to take out larger loans, opt to use their home equity as collateral.
If you already have a mortgage lender, that lender is one way for you to get a home improvement loan, but they might not be your best bet. To make sure you are getting the best deal, comparison shop with several lenders, including your mortgage servicer.
What is a renovation loan?
There are certain loans, such as the Federal Housing Administration (FHA)’s 203k loan, which are typically used to buy homes that will require renovation. In the standard FHA 203(k) program, the borrower hires a consultant to assess the construction plan and to perform an inspection. The Standard 203k program is used for larger rehabilitation projects over $35,000 (with a minimum allowable loan amount of $5,000), like tearing down and rebuilding an unlivable dwelling.
Borrowers can also consider the limited or streamlined 203k program through which they can borrow up to $35,000 for less complicated repairs.
What is a home equity loan?
With home equity loans, unlike traditional mortgages, borrowers get the entire loan amount up front, and then must repay it over the loan term. A 15-year term is typical, but with some lenders you can go as short as five years and as long as 30 years. With home equity loans, interest rates are usually fixed, but rates can be higher than with conventional mortgages.
Compare to get the best rates on home improvement loans
Regardless of what type of loan you need, shop around and compare the rates and fees offered by lenders. Start with your current mortgage lender, but don’t feel obligated to stick with them. Other banks or mortgage lenders may offer you a better rate or lower fees.
If you are using a contractor for your repairs, he may offer to finance your loan for you. Research his lender independently to ask about his past lending history before signing any financing agreements with a contractor.
Credible is a marketplace where lenders including Avant, LendingClub, PAVE, Prosper and Upstart compete for your business. You can compare personalized offers from multiple lenders on Credible.com without sharing your personal information with lenders or affecting your credit score. Emma Anderson is a journalist and creative writer who has worked in the legal field and enjoys researching various topics.