How Do Home Improvement Loans Work?

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How Do Home Improvement Loans work?

There are several reasons why homeowners feel the itch to give their home a bit of a makeover. Whether it be for comfort, safety, or adding function, it’s important to understand that home improvement projects don’t have to be a complicated process. After all, home improvements can go a long way in sprucing up your home. Your home might just be the most expensive asset that you own. So it only makes sense to maintain it, right?

By maintaining and/or improving your home, not only are you improving your home’s overall functionality but you are also maintaining, if not enhancing its value. However, home improvements that add value to your home do not come cheap. The typical range when remodeling a kitchen costs $13,274 to $37,530 while remodeling a bathroom can cost around $6,061 to $15,153. If you have about $10,000 lying around, then by all means remodel your house! Unfortunately, most people often cannot afford home renovation projects without taking out a home improvement loan.

What is a home improvement loan?

A home improvement loan’s primary function is, you guessed it, financing home improvement projects. Like most loans, home improvement loans are paid back in monthly installments. It is a type of unsecured loan; which means that there is no collateral involved. Interest rates and other loan terms depend on your creditworthiness as well as the size of your loan.

Home improvement loans can be used to repair unexpected damages, renovations, and improve the overall functionality of your home. The total amount you can borrow depends on your credit history as well as your current financial standing. This gives lenders an idea about how responsible you are when it comes to your finances as well as your overall ability to repay your loan.

How do home improvement loans work?

As mentioned above, home improvement loans are paid in monthly installments and can be used in different kinds of home projects. The way home improvement loans work is that lenders provide you with the money to maintain and/or improve your home. As the borrower, you have the option to compare a variety of different home improvement loan options that would best suit your needs.

Home improvement loans are usually offered by traditional brick-and-mortar banks and credit unions. However, the rise of online lending companies has given borrowers another channel to consider for house improvement loans. Online lenders usually have a quicker process and offer borrowers a chance to pick and choose the best interest rates and terms depending on their current financial standing.

Are there other types of loans? If so, what are the other types of loans for home improvements?

There are a number of different options to consider when financing home improvement projects. Aside from personal loans for home improvement, you also have the option to avail of home equity loans, home equity line of credit (HELOC), or loans offered by the government.

Personal Loans – Like all loans, a personal loan is money borrowed from a financial institution that you pay back in fixed monthly installments. Personal loans are flexible and can be used for consolidating debt, funding an emergency expense, or financing home improvement projects. There are two main types of personal loans: secured and unsecured. The main difference between the two is that secured loans require you to use a savings account or an asset as collateral in case you’re unable to pay off your loan while unsecured loans don’t.

Home Equity Loans – A home equity loan comes with fixed interest and fixed terms. Lenders grant this type of loan to borrowers based on the difference between your home’s appraised value and the amount you owe on your mortgage. But how does a home equity loan work for home improvements? Well, it depends. The pros and cons of using a home equity loan for home improvements depend on the two main variables mentioned above.

How much do you have left on your mortgage payments? Are you comfortable with taking on another housing-related payment each month? These are just some of the questions you need to ask yourself before applying for a home equity loan.

Home Equity Line of Credit (HELOC) – HELOCs are secured lines of credit which are also based on the equity of your home. Typically, HELOCs have two phases: the draw period and the repayment period. The draw period is the amount of time that the borrower should draw funds from the HELOC. During this period, borrowers are only allowed to make interest-only payments on the amount borrowed. Once the draw period is over, borrowers will now enter the repayment period. The repayment period requires borrowers to pay back all the money borrowed as well as the interest.

What type of loan is best for home improvements?

So for financing home improvement projects, should you avail of personal loans, home equity loans, or HELOCs? For repairs, renovations, and other home improvement projects, personal loans offer the most flexible options and the lowest rates. The best part? Personal loans are often unsecured. This means that you won’t have to use your home, or any other asset, as collateral. Another great thing about personal loans for home improvement is that a variety of lenders offer them. You can check out what banks, credit unions, and online lenders offer. From there, you can better gauge which personal loan works best for you and your current circumstances.

How do home improvement loans work in different states?

When it comes to home improvement loans, another thing to consider is where you live. According to the Consumer Financial Protection Bureau, many lenders offer slightly different interest rates depending on the state you live in. Note that some states may also have minimum loan amounts.

Can anyone secure a loan for home improvements?

Unfortunately, not anyone will be able to secure a loan for home improvements. Although lenders consider a variety of different factors when judging a borrower’s creditworthiness, there is still a benchmark that most lenders have. For instance, people with exceptional credit have a greater chance of being approved for a loan compared to people with poor credit. Lenders will also take a look at your debt-to-income ratio, employment history, as well as other assets which, depending on the type of loan you are applying for, could cover payments in the event of a financial setback.

Can I borrow more on my mortgage for home improvements?

Additional borrowing that involves increasing your mortgage is not the best idea. Increasing your mortgage for another loan means increasing the overall debt that you already have. Loans like this would also involve your house as collateral which you could lose if you are unable to keep up with your payments.

Closing Thoughts: Should I borrow money for home improvements?

At the end of the day, home improvements can be pricey. Whether it’s giving your deck a facelift or remodeling your entire kitchen, a personal loan can definitely help especially if you don’t want to use your home as collateral. Applying for a personal loan for home improvements can be a good idea depending on your current financial standing as well as the interest rate you may be able to secure. If you’re ready to avail of a personal loan for home improvement, consider Acorn Finance.

Led by a team of senior executives with decades of financial experience, Acorn Finance connects borrowers to better financing options within minutes of applying. For contractors, this means zero dealer fees and no paperwork associated with loans. For customers, this means receiving personalized pre-qualified offers with greater chances of approval. For lenders, it means getting customers who are looking to invest in their homes.

 

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