For some of us, owning a home could potentially be one of the largest investments we make in our lifetimes. Our investment sometimes spans 30 years or more. It makes logical sense that within our lifetimes, we will at some point have repairs or opt to have renovations completed on our homes. The reasons can vary by situation, home renovations are usually done to maintain a house’s value by using modern enhancements or cutting-edge designs integrated into the reno plan.
When we commit to partake in our home’s renovations, the costs can sometimes be extensive. The improvements we have planned may be difficult to manage financially. The high costs of labor and materials can quickly eat up any emergency cash. These costs may sometimes be far too large to be absorbed by a savings fund or a high-interest credit card. There are now several lenders that offer potential renovators options for a variety of home improvement loans.
A potential renovator may apply for a home improvement loan before they begin any plans for the home improvements. Lenders may then use several factors to determine the eligibility of an applicant. Overall, the applicant’s credit score could potentially be the deciding aspect for securing funding, as well as the final interest rate offered.
So, whether you have some repairs that need immediate tending in your home, or you want to bring your home’s aesthetics up to a modern version, a home improvement loan could be a possible solution.
What is a Home Improvement Loan?
A home improvement loan is a type of unsecured personal installment loan that may be more customized for potentially helping an individual attain adequate funding for immediate repairs or a large project, like a kitchen overhaul.
A home improvement loan may be a possible solution for someone who does not have enough equity built up in their home for the renovation plans they want and do not want to use their home as collateral to secure the funding. Lenders have devised a possible solution for home renovators to consider for their funding needs.
Typically, home improvement loans can range from $1000 up to $100000. The loan is paid out in one lump sum to the borrower, with repayment amortization dependent on the qualifying criteria of the applicant. The lender reviews all information relevant to the approval process for a potential borrower. This will include a thorough analysis of an applicant’s credit score, payment history, and trust ratings, that other lenders or agencies have reported to the credit bureaus. Other criteria may also be required by the lender, income verification, or any other eligibility requirements a lender may want to secure the home improvement loan funding.
What to Consider When Choosing a Home Improvement Loan
Do You Have Equity in Your Home?
As you make payments towards your mortgage, the difference in your initial mortgage amount and your balance owing will translate into your home’s equity value. This will depend on how long you have been paying your mortgage and will significantly determine the amount of equity your home may accumulate.
What Are My Other Options?
There are other options to secure funding for a home renovation project. Renovators may seek funds from family or friends, withdraw investments, or charge the costs to their credit cards. These options might work for some people, but they don’t necessarily work for others.
How Good is Your Credit?
Financial health and risk will be the deciding factor by a lender based on your ranking with the credit bureaus. It is your responsibility to ensure the information presented is accurately displayed. It is also your responsibility to maintain your integrity with your lenders by maintaining any contractual obligations you have with those lenders.
How important is it to save money?
Some people choose to have emergency cash, or savings account with regular contributions being made. These funds could potentially be useful for home repairs that may be minimal in cost and might not require the homeowner to seek any further funding. It is also worth noting that some larger home reno project costs may be too large for a savings account to handle entirely.
Do you Need Your Money in One Lump Sum or Over Time?
Usually, there are three possibilities for a home improvement personal loan. An unsecured installment loan where the loan is paid in one lump sum. A potential borrower may also seek a home equity loan, to which most lenders could offer up to 85% of the home’s equity as either a type of line of credit or as an installment loan. This line of credit allows the borrower to withdraw the money as needed. Essentially, paying interest on only what was needed. The home equity installment loan has a set repayment schedule.
Pros and Cons of Home Improvement Loans
Pros of Home Improvement Loans
The general terms for a home improvement loan will be the set repayment schedule with fixed terms. This allowance of a staggered payment structure, with the terms sometimes 10-years or more, may potentially allow a home renovator a more flexible option that does not involve using any home equity to secure. Applicants may also find that interest rates may be lower for a home equity line of credit or home equity loan. Those who choose to apply for a home equity loan can enjoy the conveniences of only paying the fees and costs for only the funds used from the credit line.
Cons of Home Improvement Loans
Having the plans to renovate your home may start as a small project and end up much larger than initially anticipated. Securing any funding as part of an installment loan or home equity loan will have the sum paid one time and in full to the borrower. Which could potentially cause grief if those funds run out before the project’s completion. An installment loan may also come at a higher interest rate than a home equity loan. A line of credit interest rate will fluctuate as the credit line matures. Although, securing a home equity loan or line of credit may involve a valuation of your home for lenders funding consideration and may have the applicant facing additional costs for securing any funds.
Home Improvement Loans Alternatives
0% APR Credit Cards
There are options for a potential renovator to consider that could be a great home improvement loan alternative. Although many credit cards operate under much higher APR rates, some exceptions may be available to an individual for securing any funds needed for a home renovation. Researching and planning for a 0% APR credit card with established interest-free terms may be a great solution. A potential renovator should have an understanding of the terms required for the interest-free period and utilize those benefits to their advantage. By maintaining the commitment to pay the debt off entirely before the end of the term. Some 0% APR credit card companies allow 12 to 24 months and upwards for a purchase to be paid off. This could be a solution for someone who wants to dwindle at their home projects over time and stagger the costs they incur.
Cash-Out Mortgage Refinance
Depending on the financial help required for the homeowner plans, a cash-out mortgage refinancing may be a solution for larger projects. The equity is paid to the borrower and added to the new mortgage balance which is composed of what you borrowed and what you previously owed. An example is a mortgage balance of $100000 with $25000 of equity paid towards the mortgage. The applicant can refinance their mortgage for $125000, whereas $25k is allocated to the borrower for the home improvements they wanted and $100k pays off the balance of the old mortgage, resulting in the new $125k mortgage.
How to Get a Home Improvement Loan
Check your Credit Score
Any potential borrower should be aware of their wealth management before they consider applying for any funding. A lender may inquire about their credit score with the bureaus during pre-qualifying procedures. Knowing what your rating is will help you better understand what possible funding you could apply for, and potentially secure. The APR that the lender could ultimately present for consideration will be directly related to the credit rating, payment history, and trust ratings you displayed with past lenders.
Research and Compare Lenders
To find the best home improvement loans that you could potentially qualify for will probably require some research on your part. Exploring a variety of lenders, or 0% APR credit cards, or even a personal loan from a family member.
There are now many lenders that can offer a pre-qualifying scenario for an applicant to consider. This process often involves a soft credit review and a mildly invasive qualification check. With these pre-qualification processes, a lender may be in a position to present an offer for review by the applicant. With the ability to essentially shop landers for the lowest APR and lowest fees for the funding.
Submit a Formal Application
After a potential borrower has reviewed any of the pre-qualification offers, they received, they should now be in a position to submit a formal application to the lender of their choice. The final approval process involves the risk management team thoroughly reviewing all information to conclude if approval is possible and the terms needed to secure the funds.
Receive Funds and Make Payments
If a home renovator agrees to the terms presented, they officially sign the contractual arrangement. Legal binding the agreement between the lender and the borrower, the deal is done. The obligation of the borrower is now binding with either fixed rates or terms. If the borrower maintains the requirements set out in the contract, the transaction will mature without issues towards the lender or the borrower.
Why Would You Need a Home Improvement Loan?
Tackling a seemingly smaller-home improvement like replacing a tub with a shower can cost a homeowner an average of about $3000-$4000 when the project is complete, whereas a thousand square foot home remodeling costs on average $15000 to $60000.
Perhaps, you are considering using a loan as a down payment for a home? In 2021, the average down payment was $27000.
The costs range vastly depending on a homeowners’ ambitions and funding. For example, in 2021, a kitchen remodel might end up costing up to $38000. A master bathroom renovation could cost $30000–$50000 upon completion.
The size of your home may directly impact the funds required for a renovation. A larger property like a 2500 square foot home may cost on average $65000 for a remodeling. Building a garage on your property can range from $16000-$37000.
The average cost to remodel a house in the USA was $73000, whereas, in some instances, a full-house renovation costs on average $44000-$75000. Regardless of where we live, the costs associated with any repairs, or renovations we may want, will directly be affected by the location and the economic stability of that area.
In New York, a home remodeling may cost $90000 for completion. Whereas, in Arkansas, a median bottom-tiered home is valued in 2020 at an average of $64000.
Regardless of if you are thinking about putting a fiberglass inground pool for an average cost of $18000-$65000, or a concrete inground pool for $29000-$60000.
Depending on why you have opted to explore your options for a home improvement loan, you would better have a direct path of focus and a solid financial plan.