A Guide to Home Improvement Loans
A home improvement loan can change the scope of your project. The idea of owning real estate is to do improvements your way, and at the most affordable price possible.
A home that lives up to your expectations will always require a few improvements here and there. To keep these upgrades from destroying your finances, getting a home improvement loan is your best bet.
What are your options?
Have you talked to the lender that handles your mortgage? They may be willing to open a home equity line of credit. Both sides win in this situation, since you get the funding for the project, and the lender adds value to the home without hiring a contractor.
The maximum amount of money loaned will be based on your credit score and other factors. There is no guarantee you will get a specific amount of money based on the current equity of your home.
That is an important thing to remember before going through the trouble of a home equity line of credit.
Term length varies for home improvements loans but there is more room to negotiate with the amount offered. Usually, the interest rate on a home equity line of credit is variable.
Ask the lender if a fixed rate option is available, but if you’re looking to hit a magic number with a loan, the variable rate may be the only choice.
Once you agree to everything and sign the contract, you are responsible for paying the money back whether the project is completed or not.
Unlike a conventional loan, your house is what’s up for grabs if you fail to honour the contract. That is why with a home equity line of credit, your top priority should always be paying back the loan.
Your second priority should be completing the project. These are not interchangeable, and the lender will have no problem evicting you from a home if you break the contract.
Another reason to consider a home equity line of credit is that it is more flexible than a normal home equity loan. If an emergency comes up, you can use the money for something else other than the home project.
You also have the option of looking at the project from beginning to end and managing costs better. Since you aren’t given the full amount of the loan upfront with a home equity line of credit, there is less chance of accidentally going over your budget.
Home equity loans
For a more traditional home improvement loan, a home equity loan is the answer. This is what you should choose if a home equity line of credit doesn’t fit your current project needs.
The collateral is still your home, so there is a very specific risk in the case of breaking the contract. With a home equity line of credit, you get a credit line that gives you the money in a more responsible manner.
With a home equity loan, you get the full amount upfront and an incredible amount of responsibility to follow through. Because of the risk from both sides, a home equity loan is one of the most difficult home improvement loans to get.
You credit score has to be good in order to be considered for this type of loan. There is also a lot of non-beneficial wiggle room that puts the power of the loan in the hands of the lender.
This is normal, and it is the main reason a home equity loan requires good research. A good home equity loan won’t put you in a bad position and will always have a good loan to value ratio.
This applies to open end and closed end home equity loans. As far as a home improvement loan goes, you should think of it as a second mortgage. It’s not just wording and is meant to put things into perspective before you borrow a large amount of money.
Home equity loan payback terms are shorter, so the price per pay period may seem staggering at first glance. You are walking a dangerous line if things go wrong with a home equity loan.
When using a home equity loan instead of a home equity line of credit, be responsible and read the contract. A home improvement loan should never be the cost of an actual home.
A FHA 203K is available on a standard and limited basis. For smaller projects, this type of loan is exactly what you need.
Failure to pay it back won’t cost you your home, and the rates are very reasonable for what they offer. There are some differences between the two, so make sure that you know how deep a project goes before committing.
A standard 203K handles projects that would cost more than £35,000. This includes repairs and structural work involved to complete the project. The most common use for this home improvement loan is to add an extra room to the dwelling.
But it has also been used as a way to alleviate the financial stress of moving a load bearing wall. If the improvement is based on seasonal or insect damage, you may qualify for additional loans at a similar rate.
There is a lot of paperwork involved with FHA 203K, and it isn’t something that you sign off on using a single signature.
You use an escrow account to set up this type of loan. Unlike the previous home improvement loans mentioned, an FHA 203K has a lot of oversight involved.
There is less risk, but there is also less flexibility with how you use the money. During each step of dispersal of funds, an inspector will come out to look at the work.
Each project allows a limited number of dispersals, so if you’re lagging behind on a specific step, this can cost you the entire loan.
No second-hand work will get by an inspector, and your drawings have to be up to date with the work that’s being performed. Trying to wing it during a project will cost you time, money and the entirety of the loan.
Limited 203K is for repairs or improvements that will cost less than £35,000. With limited, you don’t have a lurking inspector during each phase of the contract.
The money involved is less, and there are restrictions on the number of contractors that can be paid during each period. The only time an inspector gets involved is near the end of the project.
The final inspection is painless, provided you’ve followed all current guidelines. The biggest benefit of a limited 203K is not the lack of an inspector, but how quickly you get your funds without any red tape.
If you plan on hiring outside help, it can be difficult to set up dates while dealing with all of the paperwork of a standard 203K.
This is the main reason some homeowners break up a big project into smaller ones to qualify for the limited 203K home improvement loan. It’s faster, gets things done right and doesn’t make it difficult to keep your contractors happy.
This is of course situational, as some big projects don’t have the luxury of being broken up into smaller pieces. For many reasons, there has been a tightening up of eligible projects using limited 203K funds. The list varies by lender but is worth checking out if you’re interested in the benefits.
Making eco-friendly changes
Some changes you make to your home come with incredible discounts, and in some places are completely covered. Any energy efficient upgrade will have some type of bonus attached to it, even if it only relates to end of year tax advantages.
Making all the lighting in your house LED is simple but can save you tons per year. Adding solar panels reduces the strain on the environment while getting rid of a lot of extra heat in your home.
Even a small change like upgrading windows will have a positive impact on your home value for years into the future.
When considering a home improvement loan, look at eco-friendly changes first before other options. If you can manage to squeeze in some eco-friendly qualities to the project, there is a good chance you can avoid getting turned down for some of the higher tier loans.
Improvement loans in particular are very friendly to green changes you make, especially since it enhances a home’s resale value.
Look over estimates and timelines
The type of home improvement loan you get has directly to do with your own estimates and timelines. If you get either one of these wrong, it creates a strain on the entire project.
Never push through something you don’t understand when risk is risk. Reaching out to a professional should never be a last resort and may help you reach your goals without a massive delay.
Whenever there are problems with repaying a loan, be open about it with the lender. Dates move and things change, and it is better to be honest than to sweep a problem with the improvement under the rug.
Home improvement loans provide a major benefit to small or large projects. Read the fine print on the contract and push through to meet the demands of your vision. When done right, a loan of this calibre is great for everyone involved.
Find a great deal on your next mortgage
Whatever term suits your budget, RateWise can match you with a local broker that knows how to help—regardless of your credit score! Get pre-approved today.
What are home improvement loans?
Home improvement loans are sums of money lent to a homeowner to be used to renovate their property. The homeowner then pays the loan back with interest over time after the renovation is complete.
What does a home improvement loan cover?
Home improvement loans can cover remodels, landscaping, you name it. You could have the whole cost of the renovation covered or just part of it depending on how much financial help you need.
What is the difference between home improvement and home equity loan?
Home improvement loans are like unsecured personal loans, where as home equity loans are secured loans taken out with your home as collateral.