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Finding the right home improvement loan or home renovation loan can seem like a daunting prospect. It’s vital to understand all parts of the loan, like what the loan repayments terms are and how interest rates could affect your payment. Without this information, homeowners could end up taking on debt they might have trouble paying back. Read on to learn about how to get a home improvement loan so that you’re entering into a loan agreement that you can confidently afford to pay back.
Before You Begin…
A home improvement loan is money homeowners borrow specifically for a home improvement project. That money may come from a home’s equity, or a homeowner might get the loan amount itself separately. A homeowner would pay back that money on a fixed schedule, in addition to interest and any associated fees.
First, a homeowner might make sure they really need the loan. For instance, if the project isn’t a must at the moment, like a luxury addition, someone might think about saving money from their monthly budget for a while to pay for the project outright. If you are in a place where you are comfortable taking out a loan, however, read the steps below to properly secure a home improvement loan.
STEP 1: Assess your finances.
The first step is to assess your financial situation and outline how much you can spend every month. Create a realistic monthly budget, which includes any and all outgoing expenses for each month, like mortgage payments, utilities, food, entertainment, credit card payments, savings goals, and any other obligations. Then subtract that total from how much money you bring in as a household. That difference should reveal how much money you have to spare for a home improvement loan payment. You might also want to check your credit score, as this will affect what sort of interest rates you could get. Lower credit scores often mean higher interest rates. You can get your credit score in a number of ways: You can obtain it through your credit card lender, use a service like Credit Karma, or even just obtain the credit score through the loan lender you might be thinking of opting for. These methods tend to be free and won’t hurt your credit score. You can also obtain a copy of your credit report for free once a year through each of the three main credit reporting bureaus (TransUnion, Equifax, and Experian).
Many home improvement loans also use your home itself as collateral for the loan, such as home equity loans or home equity lines of credit (HELOC). Using your home as collateral means that if you can’t repay the loan, the lender can repossess your home to make up the money you didn’t pay back. But these loans allow you to borrow money based on the equity you’ve built in your home. If you’re considering these options, you can also talk to your mortgage lender about how much equity you have in your home at the moment and how much they recommend is wise to borrow against. Typically, a newer mortgage has a payment that goes mostly toward interest, not principal, and you may not have enough equity yet to borrow against.
STEP 2: Learn more about your home improvement loan options and their costs.
In general, there are six types of loans that people can access to help with home improvement costs, all of which work differently. As mentioned above, two types are home equity loans and home equity lines of credit (HELOC). You pay back the amount borrowed, usually as a monthly payment over a set period of time. You will also have fees and interest rolled into your monthly payment; the amount of interest depends on what home improvement loan rates are. The difference between a home equity loan and a home equity line of credit is the way the loan is disbursed: The loan comes as one lump amount with a home equity loan, and the HELOC is a revolving loan amount you can use as you need.
How does one get a home improvement loan without equity? A personal loan may be an option: This is simply a loan for a certain amount of money. Homeowners who choose a personal loan can pay back the loan amount incrementally on a monthly schedule along with interest and any fees. A benefit to this type of loan is that you’re not using your house as collateral as with a home equity loan or HELOC. Similarly, you might also consider using credit cards if the project is smaller. However, credit cards aren’t the best option if the sum needed is large; you can end up pushing your credit limits too high. But if you just need a few hundred to a couple thousand dollars for materials because you’re the DIY sort, you might consider using credit cards.
Two other options are cash-out refinancing and an FHA 203(k) rehab loan. Cash-out refinancing means you get cash out of your home’s equity, then refinance your mortgage to repay that amount along with the balance of the loan. The FHA 203(k) rehab loan is offered through the U.S. Department of Housing and Urban Development (HUD) and is meant for repairs to old homes that need to be modernized. A lesser-known path is also looking into grants for home repairs through the U.S. Department of Agriculture.
STEP 3: Decide which type of home improvement loan is right for you and your project.
All the different types of home improvement loans work for very specific situations. For instance, a home equity loan would be best if you have a significant amount of equity in your home or you even have the home paid off. If you have a large amount of wiggle room in your monthly budget and have a good chance of paying off that loan, the home equity loan can be a good option. It’s also a good fit for people who need a big chunk of money for a huge project, as the loan comes in one amount. For a HELOC, similar advice applies, but the revolving line of credit means you can use as much money as you need when you need it, making it better for smaller or ongoing projects. You also only pay interest on the amount of money used, not the entire amount available to you.
For people without a sizable amount of equity in their home, or those who are uncomfortable with the idea of using their home as collateral against the loan at all, personal loans or credit cards will be the better option. Consider a personal loan for larger projects, as you often get one lump sum of money as part of the loan. Similarly, cash-out refinancing and the FHA 203(k) rehab loan work in specific situations, such as if you’re looking to refinance your mortgage or you have a fixer-upper on your hands. Consider using a home improvement loan calculator to help you figure out payments.
STEP 4: Talk to potential lenders and compare your options.
Finally, look at the loans themselves. For home equity loans and HELOCs, your current lender is a go-to. You can see what they offer for home repair loans, and since you already borrow through them, they might give you a deal on fees and interest rates. However, you can inquire with other lenders to see what their terms are. Online lending companies, brick-and-mortar lending firms, banks, and credit unions are all options to consider. Financing your home project with credit cards is the easiest option, as there are a variety of well-known credit cards to consider. To obtain a cash-out refinance, you would talk to banks, credit unions, or lending companies, often those that specialize in mortgages. The FHA 203(k) rehab loan is offered through the U.S. Department of Housing and Urban Development (HUD), but you would work with an FHA-approved lender to apply for this type of loan. How does one get a home improvement loan with bad credit? If this is your case, you can talk to individual lenders about your situation. Some even specialize in working with people who have bad credit.
STEP 5: Apply for your loan.
Once you decide the type of loan that is right for you and where you want the home improvement loan to be from, it’s time to start the application process. How hard is it to get a home improvement loan? This process varies greatly, depending on which of the loans for home improvement you choose. Work closely with the lender to make sure they are supplying all the information you require. Lenders also require information, and it’s common for lenders to require personal information about you, especially during the application process and sometimes before. They may require pay stubs from the last 30 days, W-2 forms, signed federal tax returns, documentation of other income sources, bank statements, social security numbers, proof of identity, and possibly other documents. Make sure your information is accurate and complete, as incorrect information could result in a denied application. Your personal situation could even affect which documents you need to supply, such as if you are self-employed, have irregular income, or have non-wage income.
By following these steps on how to get a loan for home improvement, you can come into the loan application process more informed, prepared, and confident. Ultimately, it pays to know what types of legitimate loans are out there and the types of lenders to work through. Knowing what the best home improvement loans are for your projects and finances can also keep you out of a situation where you’re taking on an unnecessary burden to your budget.