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.

Are home improvement loans hard to get?

Home improvement loans may or may not be hard to get, there are a variety of factors that can impact the difficulty. Some of these factors include the borrow, the lender, and the loan amount. A smaller amount will probably be easier to secure than a larger amount.

Home improvement loans are a common type of loan that homeowners take out when they want to make repairs or do a remodel on their homes. They are usually designed for people with good or excellent credit. If you have poor or fair credit, you might find that taking out a home improvement loan is hard. Some credit companies are built to work with people who have poor credit, and they might be willing to give you a home improvement loan.

Home improvements loans are usually unsecured or secured personal loans. If your credit is low, you might be required to have a secure loan so that the lender has some collateral against you. If you find that it is hard to qualify for a home improvement loan, you might want to spend a few months trying to raise your debt or lowering your other debt sources.

Earlier we went into detail about various options for home improvement loans. To summarize, a home improvement loan is usually just a personal loan. If you use an unsecured personal loan, you will not have to provide any collateral. In some cases, this can make a home improvement loan easier to get. In addition, funding times are usually much faster when there is no collateral involved. The downside may be a higher interest rate. When you provide collateral and use a secured loan, you often get a low interest rate and longer term. Since the lender has collateral, their risk is reduced. Therefore, they can justify the loan without an absurd amount of interest and fees. However, if you have good credit you may be surprised with the interest rate and term you can get with a personal loan.

Is it smart to take out a home improvement loan?

This depends on your personal financial situation and whether you have some stable source of income. If you feel confident in your finances and your ability to make payments on a loan, then taking out a home improvement loan might prove very beneficial.

It might also be a smart idea if you are offered a home improvement loan with good interest rates and loan terms. If you are only offered loans with very high interest or aren’t able to afford the minimum monthly payment you offered, you might want to consider waiting to take out the home improvement loan.

With a home improvement loan, you won’t need any collateral or be putting your home at risk like you would with a home equity loan. This makes them more appealing and better in some situations for many people. If you decide that the interest or the payments are too high, you might need to try one of the following:

Budgeting or paying in cash. It might take a while to save, but you don’t have to worry about dealing with lenders or interest. If you can, saving money is always a better option.
Home equity loans or home equity lines of credit. This might be better for you if you have built up substantial value in your home. The interest rates on home equity loans are usually much lower than personal loans and might save you some money in fees.
Credit cards. If you have a low-interest credit card with a 0%APR introductory period, you might be able to find that using it is better than a personal loan. Just remember to keep track of your spending and pay it back before the introductory period ends.

While borrowing money is not always a smart idea, it can be in some cases. Borrowing money with the purpose of home improvements that can increase your home value, can be very smart. Even if you do not plan to sell your home in the near future, many home improvement projects can increase home value for years to come. In addition, creating a space at home that is functional and inviting can improve you and your family’s quality of life. Taking out a loan to complete home improvement projects may increase the total project cost. However, if you can estimate the ROI, it may be easier to justify the higher project cost. Perhaps you are using a home improvement loan to finish your basement that you plan to rent out. In a situation like this, the basement can easily pay for itself over time, even with the additional financing fees.

What do I need to know about home improvement loans?

Before applying or taking out a loan, you should try to learn as much about it as possible and know all the terms and conditions before agreeing and signing. Home improvement loans are not the same as home equity loans. Home improvements loans are usually a personal loan that is deposited directly into your bank account. You can then use the money however you want, including buying supplies for your home or even paying the contractor.
Terms and procedures can vary depending on the lender. While we can provide general advice and norms, we cannot guarantee that all lenders will operate the same way. This is why we started off by instructing you to understand the terms of your loan.

Another factor you should consider before signing into a home improvement loan is the total loan cost. In some cases, borrowers zoom into the interest rate and monthly payment. In some ways, finding the lowest interest rate possible is a good thing, but it’s not everything. For example, if you are comparing two loans and one has a lower interest rate but longer term, the total loan costs may actually be higher. If you need to go with the longer term to afford the monthly payment comfortably, then by all means pay the extra money to ensure a successful repayment. When you compare loan offers make sure you compare all parts of the offer including the fees, terms, total loan cost, etc.

Here are some general notes about home improvement loans that you should know:

They usually don’t require collateral. A home equity loan will put your home at risk or make you use your property as an asset. Personal loans for home improvement though won’t make you put up any of your assets as collateral.
They might have higher interests. Since there is no collateral, your interest might be higher than with a secured or home equity loan. Some people prefer the higher interest to the collateral.
Fixed APR and monthly payments. Your APR and the monthly payment will stay the same from the time you sign the loan agreement until the time you are done paying it off. This is good because you will always know how much you will have due and will be able to plan accordingly.
Funding is usually quick. Many personal loans for home improvement can be put into your account in as little as one to three days. The funding usually comes in a lump sum you can begin spending all of it or small amounts if you choose.

What type of loan is best for home improvements?

Many people choose to take out a personal loan for home improvement projects. An unsecured loan is generally considered the least risky because it allows you to have the money without putting up collateral or assets. Unsecured home improvement loans are usually offered by banks, credit unions, and several online lenders.

However, there are several different types of loans that can be used for home improvements. A home improvement loan will not always be the best choice for your situation. Some instances where a home improvement loan may make perfect sense are if you need to make improvements quickly or only need to borrow a small amount of money. If you are trying to finance an entire home remodel that exceeds $100,000, a home improvement loan may not even be an option. Before determining what type of loan is best, you should compare your options and take your financial situation into account.

Taking out an unsecured loan is often a fast and effective way to get the money you need for home improvement loans. If you aren’t able to take out an unsecured personal loan, there are always some other choices:

Home equity line of credit (HELOC)
Home equity loan
Cash-out refinance
Credit cards
Government loans

What is covered under a home improvement loan?

Unsecured personal loans are put directly into your bank account and the lender usually does not check what you are spending the money on. Therefore, there is no limit on what you can spend the money on. Most people spend the money on supplies, paying labor fees, or at the hardware store.

Before you take out the home improvement loan, you should invest some time into planning your projects. What do you want to complete? How much do the projects cost? Do you need to finance the entire project? Can you purchase some of the materials using financing offered by the retailer or manufacturer? Taking out a home improvement loan with no plan can lead to several problems. In addition, any time you borrow money, you should know how you intend to spend it. Impulsively borrowing money or spending money can lead to financial struggles or unmanageable debt.

Where can I get a home improvement loan?

Remember earlier when we said that a home improvement loan is really just a personal loan? This means that if a financial institution offers personal loans, you can apply and use the funds for home improvements. However, there are some lenders that specialize in personal loans for home improvements. If you prefer to use a lender that specializes in home improvement loans, you can connect with them at Acorn Finance. Acorn Finance has top national lenders that specialize in home improvement loans. At Acorn Finance you can check offers within 60 seconds or less with no impact to your credit score.

The Acorn Finance platform increases competition for lenders, giving borrowers a huge advantage. If you go into your local bank and apply for a home improvement loan, they may have the upperhand. If you have already taken the time to drive to the bank, apply, and wait around for an hour or so, there’s a chance you will just accept the offer to get the process over with. However, comparing offers from the comfort of your own home allows you the freedom to think and research on your own time. As a result, it’s likely that you will make a better and more educated financial decision.

In some cases, contractors may offer home improvement loans. Acorn Finance can partner with contractors so that they can give their customers access to a network of top national lenders. Customers are able to find competitive home improvement loan offers and contractors are able to increase revenue, a win for everyone.

How long can you finance a home improvement loan?

This depends on the bank and your loan terms. Most term lengths are between 2-7 years depending on the lender and your loan offer. While the range depends on your income and credit score as well, most lenders do not have options that are shorter than 2 years or longer than 7 years. However, at Acorn Finance, some of our lending partners can offer home improvement loans with terms up to 12 years. To qualify for a long term home improvement loan you will likely need very good credit and a qualifying loan amount. Long term personal loans are typically reserved for higher loan amounts as the lender knows you may need the extra time to repay the money. If they are able to repay the loan, the lender can profit more off a long term home improvement loan.

What is the current interest rate for home improvement loans?

Interest rates can vary, depending on a variety of factors. If you have excellent credit, you probably expect to qualify for the advertised or going rate for home improvement loans. The current lending market will affect the interest rates. However, with home improvement loans, expect a rate between 3%-36%. Finding a loan for less is hard and finding a loan with a rate of more than 36% would be very hard to pay off.

The better your credit, the lower the current rate should be for your home improvement loan. At Acorn Finance our lending partners can offer APRs as low as 3.99%, depending on your credit score.

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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