How to Find a Home Improvement Loan

By improving the amenities and structural functionality of your home, you can add a great deal of value to your largest investment. Home improvement loans are relatively easy to obtain, if you have equity in your house. If you do not, this might become an issue, but it also doesn’t necessarily mean that it’s impossible to get the loan. As a general rule, the more your house is worth, relative to your mortgage, the easier this process is going to be.

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Home Improvement Loans

With a home improvement loan, you are essentially borrowing to upgrade your house, or possibly, to fix an existing problem that has reared its ugly head. The typical loan is for a fixed amount to complete a specific project.

Unlike refinancing a home, which creates an additional mortgage, or possibly a line of credit, a home improvement loan is typically much shorter and is defined in its length and terms.

Most of the time, you will see these loans run from 5 years to 10 years. The equity in your home will serve as collateral for securing the funds, under most circumstances, and of course, your financial standing and credit score will determine the terms of the loan, like any other credit product.

First estimate the budget for your home improvements and then you can look for the best rates and lenders.

Equity is Everything

While it is possible to find financing without equity in your home, unless it’s an emergency repair, it makes no sense to “throw good money after bad.”

Most of the time, if you are doing some type of home improvement or repair that is needed and not wanted, and if you have no equity, people use other sources of funding, such as credit cards or savings.

Personal loans can work as well, but in this situation, assuming you are trying to simply upgrade your home or modernize it, equity is going to be everything.

For example, if you have $50,000 in equity in your home, it won’t take much to qualify through a bank in order to finance your project. They will use that equity as collateral, so make sure that you can afford the terms and that there is the possibility that the project will increase the value of the home as well.

Think of it as an investment, because essentially it is. Someday, you will look to sell this home and you will need that $20,000 kitchen to add to the value and sale price, otherwise this is a bad deal.

Check Your Credit Score

Make sure you know what your credit score is and that you clean up any errors or‘dings’ on your credit report. After all, if you have equity in your home, you can probably get a loan but if you have good credit, the interest rates will be much lower than they would be for somebody who has a history of defaulting.

The lender will want to see you pay off the loan, not take possession of your property. Many of them still own homes from the Great Recession, and quite frankly, they are not in the business of being landlords. It’s much simpler for everybody involved that you pay off the loan, so it should be no surprise that the better you are on paper, the better the loan is going to be.

Lines of Credit

An alternative to home improvement loans, which might be a bit simpler to qualify for, is a home equity line of credit. These are often used for these types of projects because they are open-ended loans for a negotiated percentage of your home equity.

You can use these loans for any purpose, and if you never activate the loan, you never owe anything. It’s essentially the bank telling you that they are more than willing to loan you “X percent of your home equity” if you choose to use it. Again though, the most important part is “if you choose to use it.”

It’s common for people to have a home equity line of credit that they are simply sitting on in case of an emergency. You can use it to increase the value of your home as well, and some people have even done it right before putting the house on the market.

For example, if the house needs a new roof and it is going to be detrimental to the sale value of the house and the length of time it takes to get rid of the property, quite often people will use these loans to put a roof on the house and then simply add the cost of the loan to the property when they list it.

However, even if you do plan on staying in the house for an extended length of time, adding value to your biggest investment, as a general rule, will pay off in the end.

Lending Institutions

The most obvious place to look for the loan is going to be your local bank, as they are most often suited to handle large transactions like this. However, there are some online alternatives as well, but they typically are a bit more expensive.

By working with a local bank, they know the neighborhood, and can take that into account as well, as it may be up-and-coming. If they know that your neighborhood has been increasing in value and looks to go much higher, they will be quicker to say yes.

However, like any other product that you spend money on, it is highly advisable to look around and shop for the best rate. Also, some places will offer lengthier terms than others, so that’s something to pay attention to as well. If it’s a home improvement project, remember that it’s very rarely an emergency, so take your time to find the right home improvement loan.

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