How To Get A Home Improvement Loan With Bad Credit – 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 upgrades and repairs to your home.
Specialized home improvement loans, like the FHA 203(k) mortgage, exist specifically to finance home renovation projects. Then there are second mortgages – home loans and HELOCs – that can provide cash for a home improvement or any other purpose.
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So what is the best home improvement loan? It depends on your needs. Here’s what you should know.
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A home equity loan (HEL) allows you to borrow against the accumulated equity in your home. Your equity is calculated by assessing the value of your home and subtracting the outstanding balance on your existing mortgage loan.
Unlike a cash-out refinance, a home loan does not pay off your existing mortgage. If you already have a mortgage, you will continue to make your monthly payments while repaying your new home loan at the same time.
A home loan “is distributed as a single down payment. It’s similar to a second mortgage,” says Bruce Ailion, realtor and real estate attorney.
With a home equity loan, your home is used as collateral. This means lenders can offer lower rates because the loan is secured against the property. The low and fixed interest rate makes the home loan a good option if you need to borrow a large amount.
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Keep in mind that you will likely pay closing costs between 2% and 5% of the loan balance for the home loan. So make sure the amount borrowed makes the additional cost worth it.
As a bonus, “a home loan or HELOC may also be tax-deductible,” says Doug Leever of 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 from your home equity without refinancing. A HELOC is similar to a home loan, but works more like a credit card. You can borrow up to a pre-approved limit, pay it back, and borrow again.
Another difference between home loans and HELOCs is that HELOC interest rates are adjustable; they can rise and fall over the term of the loan. But interest is only due on your outstanding HELOC balance – the amount you actually borrowed – not the entire credit line.
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You could only borrow a portion of the maximum loan amount at any one time, which means your payments and interest would be lower.
A HELOC may be a better option than a home loan if you have some long-term or cheaper remodeling projects to finance on an ongoing basis.
By the end of the term, “the loan must be repaid in full. Or the HELOC can be converted into a repayable loan,” says Ailion. “Note that the lender may be allowed to change terms throughout the life of the loan. This can reduce the amount you can borrow if, for example, your credit goes down.”
Still, “HELOCs offer flexibility. You don’t have to withdraw money until you need it. And the credit line is available for up to 10 years,” says Leever.
Home Improvement Financing
Another popular way to get cash for a home improvement project is a cashout refinance. With this option, you refinance into a new mortgage loan with a greater balance than your current one. Then you pay off your existing mortgage and keep the remaining money.
The money you get from a cashout refinance comes from your home’s equity. It can be used to fund home improvement projects like finishing a basement or renovating a kitchen. However, no rules specify which features should be applied.
A cashout refinance is often the best home improvement loan when you can lower your mortgage rate and cash out. This only works when current market rates are below the existing rate.
You can also adjust the term length to pay off your house sooner. For example, let’s say you have 20 years left on your 30-year loan. Your cash-out refi might be a 15-year loan, which means you have to pay off your house five years early.
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So how do you know whether to use a cashout refinance? Start by comparing costs over the life of the loan, including closing costs. This means looking at the total cost of the new loan versus the cost of maintaining your current mortgage for life.
Keep in mind that cash-out refinances have higher closing costs – and they apply to the full loan amount, not just the repayment. Therefore, you will likely need to find an interest rate that is 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 the home purchase and improvements at the same time when you buy the home.
FHA 203(k) home improvement loans are great when you’re shopping for a home repair and you know you’ll need financing for home improvement projects right away. These loans are government-backed, which means you’ll get special benefits – like a low down payment and the ability to apply with a less-than-perfect credit profile.
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On the other hand, this type of loan may take longer to close. “FHA 203(k) loans can be lengthy and difficult to get approved,” says Jon Meyer, loan specialist for The Mortgage Reports and licensed MLO. If you go this route, it’s important to choose a lender and loan officer familiar with the 203(k) process.
If you don’t have enough home equity to borrow, a personal loan is another way to finance home improvements.
As a personal loan is unsecured, you will not use your home as collateral. This means that these loans can be obtained much more quickly than HELOCs or home equity lines of credit. In some cases, you can get next business day loan financing or even same day financing.
Personal loans can have adjustable or fixed rates, but they are usually higher than a home loan or HELOC. That said, if you have excellent or just good credit, you can probably get an affordable rate.
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The payback period for a personal loan is less flexible, typically two to five years. And you’ll likely pay closing costs as well.
These terms may not sound so favorable. But personal loans are more affordable than HELOCs or home loans for some borrowers. If you don’t have a lot of equity in your home to borrow, a personal loan might be an option to pay for home renovations.
These loans also make sense to finance 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 also finance some or all of your plastic remodeling costs. This is the fastest and simplest financing option for a home improvement project. After all, you won’t even need to fill out a loan application.
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But since home improvements often cost tens of thousands of dollars, you need to be approved for a higher credit limit. Or you will need to use two or more credit cards. In addition, you will likely pay higher interest rates than those charged for home improvement loans.
If you need to use a credit card to finance your renovations, try applying for a card with a 0% introductory annual rate (APR). Some cards offer up to 18 months to pay off the balance at this introductory rate. This approach is only worthwhile if you can pay off your debt within that pay period.
Like personal loans, credit cards may be accepted in an emergency. But you shouldn’t use them for long-term finance. Even if you have to use credit cards as a temporary solution, you can get a secured loan later to pay off the cards.
The best home improvement loan will match your specific lifestyle needs and unique situation. So let’s narrow down your options with a few questions.
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If so, you can access lower rates by taking out loans against the equity in your home with a cashout refinance, a home equity loan, or a home equity line of credit.
If so, check the FHA 203(k) program. This is the only loan on our list that bundles home improvement costs with the home purchase loan. Simply review the guidelines with your loan officer to ensure you understand the fund’s disbursement rules.
Taking out just one mortgage to cover both needs will save money on closing costs and is ultimately a more straightforward process.
“The only time I recommend the FHA203(k) program is when purchasing a fixer-upper,” says Meyer. “But I would still advise homeowners to explore other borrowing options as well.”
Best Tips For Your Home Improvement Loan
When you need an emergency home repair and don’t have time for a loan application, you may need to consider a personal loan or even a credit card.
Keep in mind that these options have significantly higher rates than secured loans. then you will want
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