Home improvement loans are popular enough for all of the owners or developers of the property. With this loan, they will have a chance to renovate the property faster. It is helpful for many homeowners and real estate projects. For the owners who plan to renovate the property, here are some important things which they must know about this kind of loan.
What is a Home Improvement Loan?
This loan is used to describe some of the financings that the owner or developer takes for their property improvement projects. For a homeowner, this loan can be used to renovate, rebuild, or repair the facilities of the homes. That is why people also call it renovation loans. Indeed, it is because the purpose of the loan is to support the homeowners to pay any expenses for home renovation.
Why is the loan important for property owners? The renovation and another adjustment in the property cost are as good as a home investment. Thus, the improvement projects will increase the value of the property itself. That is why the loan will be the right way for homeowners to cover the cost of home improvements. For example, the new look of a home will attract many buyers to own the house.
The Way Home Renovation Loan Works
In general, the loan for property improvement can be formed as a personal loan. If someone wants to take this kind of loan, the process is very simple and quite quick. This personal home improvement loan is available online. What they can do is complete the loan application and then receive the instant offer. They can get the funds within a day. After getting the fund, it is time to renovate the property.
However, when you do not choose a personal loan, the process may take a longer time. It is because the party related will verify the home loan proposal first before approving it. Other potential loans that people can take are home equity loans, home equity lines of credit, and cash-out refinances.
Types of Home Improvement Loans
For those who plan to renovate or rebuild a certain part of their property, there are some types of home improvement loans that can be chosen. As mentioned before, someone can take a personal loan for covering the renovation cost. Also, there are some other options in the following paragraphs.
- Personal loans
Personal loans are the most common loans used for home improvement projects. Because it is an unsecured debt, how much the loan will not tie with the home value. It depends on how much funding someone wants to take to fund the projects.
Talking more about this kind of loan, it has a higher interest with a shorter repayment term. The ones who can take this loan are those who have a good credit score, about 650 or above. If someone has a lower credit score, it is better to take another loan option to avoid any risk from this loan.
- Home equity loan
Another helpful option to get a fund for a home improvement project is using a home equity loan. Put simply, this is a second mortgage in which the property will be the mortgage. In another word, the owner will use the home equity to take another loan.
For those who plan to add the equity of the property by renovating it, a home equity loan can be a good choice. However, one big note for all property owners is these home improvement loans are associated with high interest. For those who don’t have stable finances, it is better to choose another loan having a lower interest.
- Home equity line of credit
A home equity line of credit or also called HELOC is another option to get funds for home improvement projects. This way will allow the owners to borrow funds against the home equity amount. Technically, choosing HELOC means someone takes a second mortgage to renovate the property.
Those who are interested in applying for HELOC can apply to tap the equity of the home. Once it is approved, there is a draw period to pull out the fund needed. How long the period can vary. Then, at the end of the period, they must repay it. Indeed, people should consider their finances when they want to choose HELOC because it will place the property at risk when they cannot pay the mortgage.
- Cash-out refinance
Cash-out refinance will allow people to use their home equity to fund many home renovations. In this case, the home equity will be higher and higher over time. Thus, the owners can propose a new loan with higher funds than the first equity home before.
This loan offers the lowest interest among home improvement loans. Also, the owner can qualify for an income tax deduction because of the use of the loan for fixing the property. That is why this loan can be a good choice for many homeowners.
- FHA rehab loan
Can I get a home improvement loan with my mortgage? The answer is in the FHA rehab loan. This kind of loan helps all homeowners to get a fund for home improvement projects by bundling the cost with the mortgage into a single loan. It means that the homeowners do not need to apply for separate loans and pay two different loans for one property.
Why Do People Choose the Loans for Renovating the Property?
With the development of property investment in recent days, many investors will try to enhance the value of their properties to attract customers. It can be the tenants or the property buyers. In enhancing the value of the property, one of the ways is by doing home improvement projects.
Indeed, doing the project will need funds, and the fastest way to renovate the property is by using loans. People can try one of the five types of loans depending on their financial condition and also other considerations such as the interest and the mortgage of the loan. In addition, when the property owner can renovate the home soon, it means that they can start to market the property.
In this case, there are some supporting factors why many investors are interested in improving the property value. Some of the factors are the population and growth, the home price, and the living cost.
- Population and growth
FromMacrotrends.net, the population in the US increased from 2019 to 2022. The latest data shows that the population is 338,289,957 in 2022 with 0.38% growth from 2021. This growth of the population means that more people need homes. So, by improving the property, the property will be more attractive and attract many buyers.
- Home price
The home price in the US in 2022 is $428,700 (in the first quarter according to Worldpopulationreview.com). This number is expected to increase by 30% from 2021. With the increased price of the property, it is the chance for many property investors to get more profit. One of the ways is by increasing the home value through home improvement projects. To do this faster, applying for a loan for renovating the house is a good idea.
- Living cost
Living cost in the US is quite higher in 2022 with $61,334 a year for a household. It can be higher in the future, so choosing the loans to renovate the property is the best choice. With the loans, they can pay the loan monthly with their monthly income. What the investors must do here is choose the loan with the lowest interest and risk.
Choosing the Right Home Improvement Loan
Since there are several kinds of home renovation loan options, it is the homeowners’ job to choose the right loan for them. To help them decide on the loan, there are some points below which can give them a slight picture of which loan is the best for them.
- Home equity
One of the requirements for applying for HELOC and home equity loans is the homeowners have home equity. Without it, they cannot choose both HELOC or home equity loans. The best choice for those who have no home equity is a personal loan.
- Loans with quick cash
For investors who look for a loan with a quick fast, the answer is a personal loan. They can get the cash even after the one day process of the loan application. If the investors choose home equity loans or HELOC, usually those loans take more time for the verification process.
- Credit score
A good credit score will allow someone to get an unsecured personal loan. For those whose credit score is not that good, HELOC and home equity loans can be a better choice rather than a personal loan.
- Interest rate
Interest rate is important to know before the investors choose the loan for the home improvements. The HELOC loan usually has a lower interest than personal loans. In addition, the investors also must consider the closing costs.
- Lump sum or overtime fund
For homeowners who want to pay the cost of a home improvement project at once, a personal loan or home equity loan is a better choice. Meanwhile, for the overtime project, a HELOC will be the right option for the loan.
Alternatives to Home Improvement Loans
Are there any other renovation loan options for home improvement projects? Besides the five types of loans mentioned above, there is another option that people sometimes use. It is 0% APR Credit Cards. Investors can choose this kind of loan when they cannot meet the requirements of the above loans.
Putting the project of home improvement on a credit card is risky. However, if the homeowners are careful enough, it will work well. This strategy works well if the homeowners use their credit cards with a 0% APR. The introductory period of it can be several months or longer, and the common one is between 12 and 21 months.
The important point here is that homeowners must limit themselves from borrowing what they can pay off during the interest-free period. This idea is the best for the minor home improvement project. So, if the homeowners want to do a big renovation, this alternative cannot work.
Home Addition Loans: Pros and Cons
Talking about loans for home improvement projects, it cannot be separated from its advantages and disadvantages. Here are the pros and cons that all homeowners must know before they decide to take loans for renovating the property.
- The loans can be used for many home improvement projects such as repairs and home upgrades.
- The loans provide ways for people to get the fund quickly.
- There are many types of loans for homeowners depending on their needs.
- Many different lenders offer loans in different forms.
- The financial histories and credit scores can limit the range of the loans.
- It can take home equity as a second mortgage.
- Secured loans can put the property at risk if the loans cannot be repaid.
- Certain loan has a higher interest.
FAQs Home Improvement Loans
- Home Improvement Loans Government
Many lenders are providing the fund for home improvement projects including the government. For homeowners who want to apply for loans from the government to renovate the property, they can choose the FHA Rehab loan. The HUD or Department of Housing and Urban Development will verify whether someone meets the requirements for applying for this loan or not.
- Home Improvement Loans for Bad Credit
A credit score is commonly used as a requirement in applying for loans including loans for home improvement projects. For those who have a bad credit score, choosing HELOC or Home Equity Line of Credit and Home Equity Loans is the best idea. These loans will not nee the credit score as the requirements. It will be the home equity instead.
- Home Improvement Loans Rates
Before homeowners decide to take loans for their home improvement projects, they should know about their loan rates. It is important because they will know whether they can apply for a loan or not. They can check the home improvement loan rates on the internet by answering a few questions.