Apply For Home Improvement Loan – Home renovations can be expensive. But the good news is that you don’t have to pay out of pocket. A home improvement loan allows you to finance the cost of renovations and repairs to your home.
Special renovation loans such as the FHA 203(k) mortgage are available specifically to finance home improvement projects. And there are also second mortgages — home equity loans and HELOCs — that can provide cash for home repairs or some other purpose.
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So, what is the best home improvement loan? It depends on your needs. Here’s what you need to know.
Home Repair Loans: Financing For Emergencies
A home equity loan (HEL) allows you to borrow against the equity built up in your home. Your equity is calculated by assessing the value of your home and subtracting the outstanding balance due on your existing mortgage loan.
Unlike a cash-out loan, a home equity loan does not pay off your existing mortgage. If you already have a mortgage, you will continue to make its monthly payments while you repay the equity loan on your new home.
A home equity loan is “disbursed in advance of a single payment. It’s like a second mortgage,” says Bruce Allion, realtor and real estate attorney.
With a home equity loan, your home is used as collateral. This means that lenders can offer lower rates because the loan is secured against the property. Low, fixed interest rates make a home equity loan a good option if you need to borrow a large amount.
Home Renovation Loan
Keep in mind that you will likely pay closing costs of between 2% and 5% of the loan balance for your home equity loan. So be sure that the amount you borrow is worth the extra cost.
As a bonus, “a home equity loan or HELOC can be tax deductible,” says Doug Lever with Tropical Financial Credit Union, a member of the FDIC. “Check with your CPA or tax advisor to be sure.”
A home equity line of credit (HELOC) is another great way to borrow against your home equity without refinancing. A HELOC is similar to a home equity loan but works like a credit card. You can borrow up to the pre-approved limit, pay it back, and borrow again.
Another difference between home equity loans and HELOCs is that HELOC interest rates are adjustable; They can rise and fall over the term of the loan. But interest only applies to your remaining HELOC balance—the amount you actually borrowed—and not the entire line of credit.
Home Improvement Finance Options
You can only borrow a fraction of your maximum loan amount at any one time, which means your payments and interest costs will be lower.
A HELOC may be a better option than a home equity loan if you have a few less expensive or longer-term remodeling projects to finance on an ongoing basis.
At the end of the term, “the loan must be paid off in full. Or the HELOC can convert to a forgivable loan,” Elon says. “Remember that the lender may be allowed to change the terms over the life of the loan. This may reduce the amount you can borrow if, for example, your credit goes down.
Still, “HELOCs offer flexibility. You don’t have to take the money out until you need it. And the line of credit is available for up to 10 years,” Lever says.
Home Improvement Financing
Another popular way to get money for a home remodeling project is through cash back. With this option, you refinance into a new mortgage loan with a larger balance than you currently owe. Then you pay off your existing mortgage and keep the remaining cash.
The money you get from a cash-out loan comes from your home equity. It can be used to finance home improvement projects such as finishing a basement or remodeling a kitchen. However, there are no rules specifying what the funds should be applied for.
A cash-out refinance is usually the best home improvement loan when you can lower the mortgage rate and get cash. This only works if the current market prices are below your current price.
You may also be able to adjust the length of the term to pay off your home sooner. For example, let’s say you had 20 years left on your 30-year loan. Your cash-out may be a 15-year loan, which means you’ll pay off your home five years early.
How To Finance A Home Remodel
So, how do you know if you should use cash back? Start by comparing costs over the life of the loan, including closing costs. This means looking at the cost of maintaining your current mortgage for the rest of your life compared to the total cost of a new loan.
Keep in mind that cash-out refinances have higher closing costs — and they apply to the entire loan amount, not just the cash-out. So you’ll likely need to find an interest rate that’s significantly lower than your current one to make this strategy worthwhile.
With the FHA 203(k) program, you don’t have to apply for two separate loans or pay closing costs twice. Instead, you finance your home purchase and home improvement at the same time, when you buy the home.
FHA 203(k) renovation loans are great when you’re buying a fixer-upper and know you’ll need financing for home improvement projects right away. These loans are backed by the government, which means you’ll get special benefits — like low down payments and the ability to apply with a less-than-perfect credit profile.
Homeowner Loans & Grants — Home Headquarters
On the other hand, this type of loan can take a long time to close. “FHA 203(k) loans can be tricky to get approved for,” says Jon Mayer, Mortgage Reports loan expert and licensed MLO. If you go this route, it’s important to choose a lender and loan officer who are familiar with the 203(k) process.
If you don’t have enough home equity to take out a loan, a personal loan is another way to finance a home improvement.
Because a personal loan is unsecured, you won’t use your home as collateral. This means that these loans can be paid off much faster than HELOCs or home equity lines of credit. In some cases, you can get loan financing the next business day or even the same day.
Personal loans can have adjustable or fixed rates but they are generally higher than those for a home equity loan or HELOC. That said, if you have excellent or even just good credit, you’re likely to get a cheaper rate.
Home Improvement & Renovation Loans
The repayment period for a personal loan is less flexible, often from two to five years. And you’ll likely pay closing costs, too.
These conditions may not be so favorable. But personal loans are more accessible than HELOCs or home equity loans for some borrowers. If you don’t have much equity in your home to borrow, a personal loan can be an option to pay for home repairs.
These loans also make sense for financing emergency home repairs—if your water heater or HVAC system needs to be replaced right away. Still, Meyer cautions that personal loans are the “least advisable” option for homeowners.
You can finance some or all of your remodeling costs with plastic. This is the fastest and simplest financing option for home improvement projects. However, you don’t even need to complete a loan application.
Use A Renovation Loan To Turn Old Into New
But because home improvements often cost tens of thousands of dollars, you need to be approved for a higher credit limit. Or, you need to use two or more credit cards. Additionally, you will likely pay higher interest rates than those charged with home improvement loans.
If you must use a credit card to finance your repairs, try to apply for a card with an introductory 0% annual percentage rate (APR). Some cards offer up to 18 months to pay off the balance at this introductory rate. This method is only worthwhile if you can pay off your loan within the repayment period.
Like personal loans, credit cards may be acceptable in an emergency. But you should not use it for long-term financing. Even if you use credit cards as a temporary solution, you can get a secured loan to pay off the cards later.
The best home improvement loan will fit your unique lifestyle needs and unique situation. So let’s narrow down our options with a few questions.
Best Home Improvement Loans Of June 2023
If so, you may be able to access lower rates by borrowing against the equity in your home with a cash-out refinance, home equity loan, or home equity line of credit.
If so, check out the FHA 203(k) program. This is the only loan on our list that bundles home improvement costs with your home purchase loan. Just review the instructions with your loan officer to make sure you understand the distribution of funds rules.
Taking out just one mortgage to cover both needs will save you money on closing costs and is ultimately a more straightforward process.
“The only time I recommend the FHA203(k) program is when buying a fixer-upper,” says Meyer. “But I would still advise homeowners to explore other loan options.”
Usda Renovation Loan
When you need emergency home repairs and don’t have time to apply for a loan, you might consider a personal loan or even a credit card.
Just remember that these options have much higher rates than secured loans. So you want
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