Intro: Finding the Best Home Improvement Loans | Guide to Financing Home Improvements
Home improvement loans are critical to the upkeep of your house. The universal problem is financing. Loans for home improvement can make much needed changes to your home a reality. When home improvement financing is done correctly, you can stay within your budget while making your home a nicer place to live and adding value.
Image Source: Home Improvement Loan
Adding value is often a central goal to those interested in selling their home. Financing home improvements at reasonable rates can boost your asking price without breaking the bank. In this guide, we’ll review the best resources available for those seeking home improvement loans and the best way to finance home improvements.
What Is a Home Improvement Loan?
Quite simply, a home improvement loan is a method of financing repairs or renovations to your house. Some may seek this option when first buying a home that requires extensive repairs before it becomes livable. Others may need a home improvement loan after years of stress to the infrastructure.
Many find the home improvement loan an attractive option because it offers benefits like speedy, simple applications, and it allows the buyer to use the equity in their home to secure the funds. Home equity is not a requirement for loans for home improvement, though they do allow a borrower to capitalize on a history of payments.
Starting with Costs
The first step in securing the best method for financing home improvements starts before even getting a loan. To limit your total loans for home improvement costs, you’ll need to get an appraisal for the required work. Consider obtaining two or three quotes to ensure you’re getting the best deal before seeking a home improvement loan. Request weekly updates on the running total once you’ve selected a professional to complete your work. This prevents escalating costs and unexpected totals upon completion.
Remember that even the final quoted figure is just an estimate. One construction professional remarked, “Estimate prices and multiply by 1.5 times for a truer figure.” Home improvement loans are for finite amounts, so make sure you’re realistic about the total, true cost.
Home Improvement Loans with Bad Credit
Poor credit will make the home improvement financing far more challenging. However, there are options available. A homeowner can effectively boost their home equity by adding the security of valuable personal property. If a close family member has strong credit, they may agree to act as a co-signer to help facilitate loans for home improvements. Consider these lenders that will extend home improvement loans for bad credit:
Image Source: Prosper.com
This option, however, will inflate your interest rate. As a result, the total cost of the project will be greater. But this is still a better option than home improvement financing through credit cards, which will carry an even greater cost. Be cognizant of the additional fees the above option carry.
In some cases, there are processing fees and late payment penalties that can impact financing for home improvements.
FHA Title I Loan
With an FHA home improvement loan, the financing for a home improvement loan originates from conventional sources like banks and qualified lenders. The difference comes from the FHA which insures the lender. The maximum term is 20 years with a limit of $25,000. This is one of the best ways to finance home improvements for those with only a small amount of equity in their home. There are some distinct advantages:
- The mortgage on your home will not be altered in any way
- Decisions come in just a few days, so financing home improvements is fast
- Often, no security is required for loans under $7,500
- This option is available nationwide
- You can use FHA Title I loans for appliances
Image Source: US Department of Housing and Urban Development
Locate an FHA-approved lender for loans for home improvements by calling HUD’s Customer Service Center at (800) 767-7468.
FHA Home Improvement Loan 203(k) Program
This loan option backed by the federal government is an excellent option for those purchasing a “fixer-upper” or simply refinancing. In this case, home improvement loans are wrapped into the mortgage loan.
The loan also includes a “contingency” provision allowing for up to a 20% increase in funding in the event that the repairs exceed expected costs. This is a major differentiating factor compared to conventional loans for home improvements.
A second provision provides up to six months of mortgage payments that can be made during the renovation process while temporarily displaced from the home. Use HUD as a resource in researching this option.
This is an excellent option for those seeking home improvement loans with no equity. The FHA is incentivizing people to make otherwise uninhabitable places viable for community growth. Opportunities for home improvement loans with no equity are scarce, so investigate this one carefully.
Compare Home Improvement Loan Rates
Banks are competing for your home improvement loan business. Rates are aggressive and many offers advertise “no fees.” In today’s buyer’s market, you can command the best. If you have a good credit score, be sure to leverage it for the best possible rate.
The best home improvement loans will have flexible terms, low rates, no fees, and a fast processing time. Consider an aggregator site to quickly compare loans for home improvement by their rates. Bankrate.com has a strong interface for these comparisons.
Image Source: Bankrate.com
You’ll be in a better negotiating stance when you understand your “loan-to-value” ratio or (LTV). This number will be a big determining factor when the bank decides what you can borrow.
The absolute upper limit (for those with solid credit) is 80%. An LTV of 80% means that your home improvement financing can reach as high as $140,000 on a home with an appraised value of $140,000.
However, lenders will deduct the current mortgage balance from this figure to arrive at your final, eligible loan amount. Some of the best home improvement loans can be found through online-only sources.
For the best home improvement loan rate, you’ll need to be able to show that your monthly mortgage payment (and all other debt payments) do not total more than 36 percent of your gross monthly income. When accounting for just the mortgage payment alone, your total payment should not exceed 28 percent of your gross monthly income.
If the payments are too high on your potential home improvement financing, then consider extending the term. This will increase the total interest paid over the lifetime of the loan. The benefit is that your monthly payments will be far less. “Points” represent another tool for lowering monthly payments on loans for home improvements.
Points are payments on the loan in advance. One point equals 1% of the total value of the loan. These points may be a necessity in simply acquiring the home improvement loan if it’s a home improvement loan with bad credit.
Home Equity Line of Credit
With a home equity line of credit, a lender will authorize a total borrowing limit. This limit doesn’t come to you as a single lump sum payment. Rather this is a credit limit, a pool of money you draw from as needed to make the improvements.
This represents a variable interest credit line. Home improvement loans like this often last no more than 10 years, at which point you are required to begin making repayments. The amount offered will be influenced by three factors:
- Remaining mortgage balance
- Value of your home
- Credit score
There are cautions to consider. Ask the lender plenty of questions and read the fine print. In some cases, the bank will require that you immediately withdraw a specific sum at closing. This can be a problem.
If your desired home improvement loan amount is less than this sum, you’ll be withdrawing more than you need.
Image Source: Bankrate.com
As mentioned before, these variable rate products may promise low numbers today, only to hit you with big ones tomorrow.
Also, considering the above list of three influencing factors, be aware that this is usually not a sound option for those seeking a home improvement loan with no equity. Consider these lenders for optimal rates:
Remember, when you engage in a home equity line, you’re putting your house at some degree of risk. If there is an emergency or a catastrophic event and repayments cannot be made, then you may lose your home. Very few home improvement loans are worth this risk if your chance of defaulting is high.
Getting Value from Home Improvement Loans
Many people seeking loans for home improvements do so for a better sale when they put their home on the market. If this is your goal, take time to consider what areas of the home traditionally yield the best return value for your investment. Consider starting with the bathroom.
It is a small space that offers strong return without a lot of space to cover. The average remodel cost will run approximately $10,500 with a 102% return.
A kitchen “face-lift” offers great value because the return can actually exceed the value of a full-scale remodel. Small loans for home improvements can accomplish a “like new” kitchen without heavy costs.
With a minor remodel, expect to pay an estimated $21,695 and get only a 72.8% return, according to statistics from “The 2010-11 Cost vs. Value Report” by the National Association of Realtors and Remodeling. Financing home improvements is a bit of a science, so apply the rigor of numbers — not just style — when implementing a choice.
Interestingly, the return on investment (ROI) decreases as the level of the home improvement loan increases. A mid-range remodel will run an estimated $58,367 with an ROI of 68.7%, while a major remodel will run you an average of $113,464 with a scant ROI of 59.7%.
These figures will have little impact on your loans for home improvement if the drive to remodel is purely stylistic. However, if boosting the value (or perceived value) of your home via home improvement loans is the goal, be sure to look before you leap.
Image Source: MHCustom.com
Popular Article: Should I Payoff My Mortgage Early? Prepayment Penalty Definition!
Take Small Steps
Loans for home improvement are expensive. Consider breaking the process into many small parts and tackling one room at a time. Home equity lines, as discussed above, can be a useful tool in this regard. Avoid unsecured home improvement loans unless absolutely necessary. Often, this option is available in lower dollar amounts.
Lightstream.com offers financing for these kinds of loans. Interest rates run higher (often higher than a home equity line of credit). The elevated interest rate for these loans for home improvements reflects the higher risk the lender is accepting in extending an unsecured loan. This option is not a shortcut for those with a poor credit history. In fact, you’ll usually need a higher credit score to secure such a home improvement loan.
Other costs will be less visible. The cost of a poor contractor and subpar work will affect home improvement financing. When a project begins, it is difficult to curtail escalating costs affecting your home improvement loan. Nearly all projects end with higher costs than what professionals originally quoted, thereby making accurate financing for home improvements difficult.
If you’ve opted for a home equity line of credit to secure financing for home improvements, remember that there is a limit to the drawdown pool. If the total cost of the project exceeds what you’ve been granted, you’ll be left with unfunded expenses.
The best way to finance home improvements is with research and a measured approach. Consider vetted sources like HUD. Resources on energy efficiency also prove useful in estimating the hard numbers behind the value of your home improvement loan.
AdvisoryHQ (AHQ) Disclaimer:
Reasonable efforts have been made by AdvisoryHQ to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms for details. Also review each firm’s site for the most updated data, rates and info.
Note: Firms and products, including the one(s) reviewed above, may be AdvisoryHQ's affiliates. Click to view AdvisoryHQ's advertiser disclosures.