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Improving your home might be a goal for many reasons. It can increase the value of the property for more profit when you’re selling or renting it out. Improvements can also make life more enjoyable for you and your family. But they can be expensive—the average cost of a small kitchen renovation is between about $13,000 and $37,500 according to HomeAdvisor, for example.
Homeowners who want to update their homes often turn to financing as a way to pay for improvements. Find out about home improvement loans and whether they might be an option for you below.
How Do Home Improvement Loans Work?
The specific terms of home improvement loans depend on which type you apply for, but the general concept is that a lender agrees to give you a certain amount of money and you agree to pay it back with interest. In some cases, the lender might require that you use the money for a specific purpose that you stated beforehand. In other cases, the funds are provided as a personal loan for you to use as you see fit.
You can get money for home improvement from a variety of lenders, including banks, personal loan companies, mortgage companies and government agencies. You could also tap your credit lines or credit cards.
How much you can borrow and the rates you’ll pay on the debt depend on a variety of factors. Those include your credit history and whether or not you’re putting up collateral such as home equity.
Types of Loans You Can Use for Home Improvements
Personal Loans
Personal loans are unsecured signature loans. That means you don’t typically put up collateral, and with some exceptions, you can generally do what you want with the loan funds. You make monthly payments as agreed upon, usually for a period of a few years.
Pros: You may be able to get a personal loan that doesn’t require collateral such as home equity. That means you don’t put your homeownership on the line with the loan.
Cons: The lack of collateral makes the loan riskier for the lender, which usually means a higher interest rate and overall loan cost for you.
Credit score requirements: You may be able to find personal loan lenders willing to work with someone with little credit history or only fair credit. However, to get decent rates on a large loan, you may need a good or excellent credit score.
Government Loans
You might be eligible for government loans and assistance programs to modify or repair your home. For example, HUD offers information about home equity conversion mortgages for seniors as well as the Title I Property Improvement Loan Program. Some homeowners may be able to borrow up to $35,000 via the 203(k) Rehabilitation Mortgage Insurance Program, and the VA offers some home refinance options for eligible veterans.
Pros: The credit requirements for government programs and government-backed loans tend to be a bit laxer than when you’re dealing with banks.
Cons: These programs might have very specific eligibility requirements and terms that you have to follow closely. For example, you may be required to use the funds for specific purposes.
Credit score requirements: This varies according to program, but you may be able to access some options with less-than-stellar credit.
Home Equity Loans
A home equity loan (“HEL”) draws on the amount of equity in your home. For example, if your home is worth $100,000 and you only owe $70,000, you may be able to get a loan for close to $30,000 based on the equity.
Pros: Home equity loans are secured by the value in your home, which makes them a less risky investment for lenders than personal loans and credit cards. That helps you get a lower interest rate, making HELs typically less expensive than other home improvement loans.
Cons: The loan is tied to your home ownership. If you default on the loan, the lender can force the sale of your home to recoup its losses.
Credit score requirements: You don’t need a stellar score to refinance your mortgage, so you might not need a great score to take out a home equity loan.
Home Equity Lines of Credit (“HELOC”)
A home equity line of credit is a revolving line of credit based on the equity in your home. The terms work a bit more like a credit card than the terms of a home equity loan do. That means you draw on the credit line as needed to cover repairs and pay it back over time. You can draw again on the funds as you pay them back.
Pros: HELOCs can be a flexible source of income, making it easy to manage costs for renovations without running up excess debt. And because they’re secured by the value in your home, they may come with more favorable terms than credit card debt.
Cons: Again, the debt is tied to your home. If you default on the line of credit, the lender can force the sale of your home to get its money back.
Credit score requirements: Credit score requirements for HELOCs are similar to those for home equity loans.
Other Ways to Pay for Home Improvements
Credit Cards
If you have a credit card with a high enough balance, you can put goods and services on it. The downside is that you might pay high interest on that debt. Alternatively, if you have a strong credit score, you might be able to get approved for a new card with a zero percent introductory APR offer. That might let you pay off your home improvement expenses over a year or two without added interest expense.
Cash-Out Refinancing
If your home has equity, you can also consider a cash-out refinance. If you owe $70,000 and your home is worth $100,000, you may be able to refinance and borrow $95,000. (The other $5,000 If your credit is better than when you bought the home or conditions are more favorable, you might even get better rates.
The $70,000 you owe is paid to the bank holding the original mortgage. You cash out the roughly $25,000 left and can use it as you see fit, including repairing your home.
Tips for Getting a Home Improvement Loan
If you’ve decided to pursue a home improvement loan, use these tips to increase your odds of getting the deal that you want.
Have Specific Terms in Mind
Plan ahead rather than reaching for the loan and then deciding what you’ll do. Define your home improvement plan and budget, and consider whether you can get funding for that much money.
Get a Cosigner If Necessary
Consider whether you might need a cosigner. Depending on what type of loan you want to apply for, a cosigner might help if you don’t have great credit or if your income doesn’t meet the requirements of the lender. Keep in mind that the cosigner will also be taking on all the obligations of the debt.
Know Your Credit Score
Finally, check your credit score and credit reports before you apply. Understanding where you stand helps you choose the financial products you’re more likely to qualify for and avoid unpleasant surprises during the application process. Getting a good look at your credit reports also helps you understand whether there are inaccurate negative items bringing your score down. If that’s the case, consider working with Lexington Law to repair your credit and potentially open more home improvement loan doors in the future.
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