Getting a loan for home improvement might not be as easy as one might think. Applicants may need to go through various verification processes before getting approved. To increase one’s chances of getting a loan, one should have a good credit score, credit history, and other financial resources.
Are you new to loans for home improvement and don’t know where to start? Read on to learn more about loans for home improvement, what is home improvement, how to get one, and how to choose the right one for your needs.
What is A Home Improvement Loan?
We all know that renovating and making repairs at home can be downright stressful both mentally and financially. A home improvement loan is a loan that helps homeowners accomplish minor or major projects at home and may ease the stress of managing financial expenses.
Once your loan gets approved, the funds you receive can be used for necessary home repairs like plumbing problems, leaky roofs, broken floor or wall tiles, etc. You can also use the funds for home renovations like building a new garage, upgrading kitchen furniture, and the like.
You may be wondering how to find a loan for home improvement. You will learn how in the succeeding parts of the article.
How Does it Work?
Before we dive into the gist, first let me explain how home improvement loans work. There are basically various types of loans you can use for your projects at home. Examples of loans are personal loans, HELOCs, Cash-out refinance, home equity loans, etc.
You can choose either of these options for financing home improvement. Like other types of loans, one needs to go through an application process with a lender. Your loan application will be verified and processed, and once approved, you can get your funds. Approval may be based on credit score, credit history, and income. Know more about these loan types in the next part.
How to Get a Loan for Home Improvement?
For most people, personal loans are the most convenient loan option if you are planning to renovate your home. It’s not only flexible on any type of project you plan to work on, but it’s also one of the easiest ways to get funds compared to other loan types.
A personal loan is unsecured. This means that it does not involve your property as collateral for the loan. So if ever you are not able to pay the loan on time, you don’t have to worry about losing anything.
Lenders usually approve applicants with a credit score of 620 and above. Depending on your loan policy, you may need to pay higher or lower interest rates.
Home Equity Lines of Credit (HELOCs)
A Home Equity Line of Credit, also known as HELOC, is another loan option to improve your home. Unlike personal loans, HELOCs are a type of secured debt wherein, your property will be used as collateral for the loan. This is beneficial on the side of the lender, however, it may put your house at risk if you fail to settle your monthly payments.
A HELOC will allow property owners to borrow money against the amount of their home equity. If you get a HELOC, it’s like opening a second mortgage loan. Once you get approved, you will time be given a draw period, which is the period when you can borrow money from a revolving line of credit. During this period, you are only required to pay the interest on the amount of money you borrow.
After the draw period is the repayment period, which is the period when you need to pay the loan back along with interest. A HELOC is a good option for homeowners who wants gradual home improvements, however, homeowners must ensure they have enough capabilities to pay their credit or risk losing their property altogether.
Cash-out refinance is another alternative loan for home improvement wherein, you will utilize a part of your home equity to finance home renovations and repairs. Let's say, the total home value you need to pay is 200,000 dollars, and you already paid 75,000 dollars. Your home equity is 75,000 dollars, which is the amount you already paid on your mortgage, then you have a remaining mortgage balance of 125,000 dollars.
Now, if you need a budget of 20,000 dollars for home renovation, you can opt to utilize a part of your equity and refinance to a new mortgage with a 145,000 dollars balance. Unlike other alternative loans, cash-out refinance usually offers low-interest rates.
Home Equity Loans
This type of loan is a good option for homeowners who have accrued high equity over the years. A home equity loan is a type of loan wherein you will use your home equity as collateral for a new loan without refinancing your current mortgage loan. It’s more like opening a second mortgage.
Take note though, that home equity loans usually have high interest rates. Moreover, since you already opened another loan along with your existing mortgage, you typically need to pay two mortgages every month. Thus, you have to make sure you have enough savings and income to settle monthly payments to avoid risking your property.
If your home improvement plans only include short-term projects like repainting, furniture upgrades, or basic repairs, you may want to opt for a credit card.
Credit cards usually have Annual Percentage Rate (APR). Once you apply for a credit card, your APR depends on your credit score. The higher your credit score, the lower your APR (usually about 20 percent).
Other credit cards also offer a zero percent APR promotional period. You can pay off your credit within the promotional period without paying any interest. On the other hand, if you fail to pay within the promotional period, you may end up paying exorbitant interest rates.
Choosing the Right Loan for Home Improvement
Before opting for a home improvement loan, you should make a thorough research and explore various options. Assessing whether your home improvement projects are short or long-term can also help you decide whether to choose long-term loans like HELOCs or home equity loans, or short-term loans like credit cards, personal loans, etc.
How to Get a Loan for Home Improvement
Aside from a good credit score, you also need to make sure you have the following general requirements:
- Loan application
- Proof of identity
- Employer and income verification
- Proof of address
Note: To be able to apply for a loan, you need to find an eligible lender. You can find one from various lending companies like Rocket Loans, Light Stream, So-Fi, and the like. Additionally, you can apply for personal loans or credit cards from trusted banks within the US.
Financing home improvement projects can be quite expensive, which leads most people to get extra loans. There are different types of loans you can use for home improvement as mentioned above, but before opting for one, you must consider several factors like your income, savings, and project type (whether long-term or short-term).