Best Bank For Home Improvement Loan – Home renovations can be expensive. But the good news is that you don’t have to pay out of pocket. Home improvement loans allow you to finance the cost of upgrades and repairs to your home.
Specialized rehab loans like the FHA 203(k) mortgage exist specifically to finance home improvement projects. And then there are other mortgages — home equity loans and HELOCs — that can provide money for home remodeling 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 equity you’ve built up in your home. Your equity is calculated by taking into account the value of your home and subtracting the balance owed on your current mortgage loan.
Unlike a cash-out refinance, a home equity loan does not pay off your current mortgage. If you already have a mortgage, you would continue to make monthly payments on it, while paying off the new home equity loan at the same time.
A home equity loan “is distributed as a one-time down payment. It’s like a second mortgage,” says Bruce Ailion, a realtor and real estate attorney.
With a home loan, your home is used as collateral. This means that lenders can offer lower rates because the loan is secured by the property. A low fixed interest rate makes a 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 home loan closing costs, ranging from 2% to 5% of the loan balance. Therefore, the amount you borrow must offset the additional cost.
As an added bonus, “a home equity loan or HELOC may also be tax deductible,” says Doug Leever of Tropical Financial Credit Union, a member 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 home equity without refinancing. A HELOC is similar to a home equity loan, but functions more like a credit card. You can borrow from him up to a pre-approved limit, pay it back and borrow from him again.
Another difference between home equity loans and HELOCs is that HELOC interest rates are adjustable; they can rise and fall over the life of the loan. But interest is only paid on your outstanding HELOC debt — the amount you actually borrowed — not on the entire line of credit.
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You can only borrow a fraction 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 equity loan if you have several lower-cost or longer-term remodeling projects that you finance regularly.
By the end of the term, “the loan must be paid in full.” Or a HELOC can be converted into an amortizing loan,” says Ailion. “Keep in mind that the lender may be allowed to change the terms during the term of the loan. This can reduce the amount you can borrow if, for example, your credit goes down.”
However, “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.
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Another popular way to get money for a home improvement project is with a cash-out refinance. With this option, you refinance a new mortgage loan with a higher balance than you currently have. You then pay off the current mortgage and keep the remaining money.
The money you get from a payoff refinance comes from the equity in your home. It can be used to finance home improvements, although there are no rules that say cash must be used for the purpose of this loan. You can just as easily invest your money, use it to consolidate debt, or deposit a lump sum into your bank account.
A cash-out refinance is usually the best home improvement loan where you can lower your mortgage rate as well as raise cash. This only works when current market rates are below your current rate.
You may also be able to adjust the term length to pay off your home sooner. For example, let’s say you have 20 years left on a 30-year loan. A pay-off refi could be a 15-year loan, meaning you would need to pay off your home five years early.
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So how do you know if you should use a cash out refinance? You should compare costs over the life of the loan, including closing costs. This means looking at the total cost of the new loan compared to the cost of keeping the existing mortgage until the end of the term.
Keep in mind that cash-out refinances have higher closing costs — and they apply to the entire loan amount, not just the cash back. So you’ll likely need to get an interest rate that’s much lower than your current rate for this strategy to be profitable.
With the FHA 203(k) program, you don’t have to apply for two separate loans or pay closing costs twice. Instead, when you buy a home, you finance the home purchase and home improvements at the same time.
FHA 203(k) rehab loans are great when you’re buying an upper and know you’ll need financing for an immediate home improvement project. These loans are also backed by the government, which means you get special benefits – like a low down payment and the ability to apply with less-than-perfect credit.
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On the other hand, closing this type of loan can take longer. “FHA 203(k) loans can be drawn down and are difficult to get approved,” says Jon Meyer, The 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 and can help you with it.
If you don’t have enough funds to borrow, a personal loan is another way to finance home improvements.
Since a personal loan is unsecured, you won’t be using your home as collateral. This means that these loans can be obtained much faster than HELOCs or home equity lines of credit. In some cases, you may be able to get loan financing next business day or even same day financing.
Personal loans can have adjustable or fixed interest rates, but they are usually much higher than a home equity loan or HELOC. However, if you have excellent or even good credit, you can probably get an affordable rate.
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The personal loan repayment period is less flexible, often between two and five years. And you’ll likely pay closing costs, too.
These conditions may not be favorable at all. But personal loans are more affordable for some borrowers than HELOCs or home equity loans. If you don’t have enough equity in your home to borrow, a personal loan may be an option to pay for home renovations.
These loans also make sense for financing emergency home repairs — if, for example, your water heater or HVAC system needs to be replaced right away. However, Meyer cautions that personal loans are the “most recommended” option for homeowners.
You can always finance part or all of your remodeling costs with plastic. This is the fastest and easiest financing option for a home improvement project. After all, you won’t even have to fill out a loan application.
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But because home improvements often cost thousands of dollars, you need to be approved for a higher line of credit. Or you will have to use two or more credit cards. In addition, you will likely pay interest rates that are much higher than those charged with home improvement loans.
If you need to use a credit card to finance renovations, try applying for a card with a 0% introductory annual rate (APR). Some cards offer up to 18 months to pay back the balance at that introductory rate. This approach is only worthwhile if you can pay off your debt within that repayment period.
Like personal loans, credit cards can be eligible for emergencies. But you shouldn’t use them for long-term financing. Even if you have to 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 suit your specific needs and unique situation. So we’re narrowing down your options with a few questions.
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If so, you can access the lowest rates by borrowing against the principal on 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 combines home improvement costs with your home purchase loan. Be sure to review the guidelines with your loan officer to make sure you understand the payout of the fund rules.
Taking out one mortgage to cover both needs will save you money on closing costs and ultimately make the process simpler.
“The only time I would recommend the FHA203(k) program is when I’m buying a condo,” says Meyer. “But I would advise homeowners to check with others