Last Updated on October 13, 2021 by Maggie Looker
If you are looking for ways to make improvements on your home, whether it be an addition, renovation, or upgrade like a new HVAC system, you need to know about the different types of financing you can get. No matter how you choose to make changes, you’ll need financing to start your project. To look for financing, homeowners will turn to a bank in order to get a home improvement loan. Luckily, there are several options including a personal loan, home equity loan, or a short term loan.
Keep reading to find out what home improvement financing options are available to you and don’t forget we have lending specialists that know the programs and options specifically for heroes like you!
Personal Loans
The availability of loan options depends on the size of your project. If you are planning a small change in your house, such as tearing down a wall to make a more open space, a personal loan would be the best option. Personal loans can be anywhere between $1,000 and $50,000, and you don’t need equity to qualify for one. The downside to personal loans is that you’ll have to pay higher interest rates than home improvement loans. Also, your repayment period is typically between two and five years, whereas home equity loans have repayment periods of five to 30 years.
Home Equity Loans
If you are planning a large-scale project, home equity loans allow you to take a second mortgage that is secured by your home. Just like your first mortgage, this loan requires monthly payments at a fixed rate. If you miss your payments, the lender can foreclose on your home, so make sure you have money upfront to help pay for this loan. Just like when you purchased the home initially, you need to save up ahead of time to make sure you can cover expenses while you are working on your home.
How Much Equity Can I Borrow?
Lenders usually allow for 85% of the value of your house. Some lenders might offer up to 100% equity, but that is not a guarantee. If you can keep the renovation, rebuild, or repairs below that amount, you’ll have less of a monthly payment. As with any lender, the amount offered also has to do with your debt-to-income ratio, which can affect your fixed-rate interest as well.
Here’s an example of how home equity loans work: If you bought a house for $250,000 and already paid off $60,000 of the mortgage since you purchased it, you have $60,000 in equity. The remaining balance on your loan is $190,000, as long as your house’s value has stayed the same. If a lender lets you borrow 85% of the value of your home, that gives you $212,500. You still owe $190,000 in mortgage, so that is subtracted, leaving you with $22,500 in equity that you can borrow.
Interest Rates
Most home equity loans have fixed-rate interest, but they are usually higher than typical mortgage rates. Most banks and lenders start with a set rate and then adjust your rate based on how large the loan is, what the value of your home is, your existing mortgage balance, as well as your income and credit score.
Are There Other Options for Home Improvement Financing?
Home Equity Line of Credit
A line of credit allows you to use the equity in your home as collateral. The lines of credit are also revolving, meaning you can borrow a certain percentage and pay it back for the full repayment period. This is different than the home equity loan.
Cash-Out Refinancing
A cash-out refinance is a new mortgage that you take out on your home. The difference between this and the home equity loan is that a cash-out refinance replaces your original mortgage, instead of having to pay two mortgage payments. You receive cash at the end of closing and can start making improvements on your home right away. Your new mortgage will have a new balance, interest rate, payment, and terms.
Government Programs for Home Improvements
Some government programs can help with your home remodels. They are federally insured, so lenders are more willing to broaden requirements. These programs include Title I loans, which allow for up to $25,000, and Energy Efficient Mortgages which enable homeowners to finance energy-efficiency improvements that are cost-effective. Contact our lending experts and they will help you find the right programs for your situation.
What’s the Process of Applying for a Home Improvement Loan?
Work on Your Credit
Lenders will always check your credit score before lending you money. They need to make sure you have a history of paying back the money you’ve borrowed. You will most likely need a FICO score of 620 or higher, though some home equity loan and personal loan lenders will accept as low as 580. If you want to make improvements on your home, working on your credit will save you interest payments, and therefore money in the long run.
Know Your Budget
Everyone has a budget, whether they plan one or not. Just because you are eligible for a $20,000 loan does not mean you need to spend that amount on your home. Make sure you borrow what you can afford to pay back. Whatever it is you’re thinking of implementing, you also don’t need to spend your entire loan on it. If you have left over funds at the end of your project you can use it to pay your loan back sooner.
Choose Your Repayment Term
Look into your finances and see how long it will take you to pay off your loan. If you are making long-term changes to your house, paying for a long-term home equity loan makes sense. If you’re making small improvements, like replacing flooring, it doesn’t make sense to get a home equity loan. You’ll still be paying for the floor long after you’ve replaced it a second time.
Homes For Heroes
If you are looking to make improvements on your home, sign up with Homes for Heroes to get in contact with one of our lending specialists. They’re experts in home loan options, including loans and programs for military, law enforcement, teachers, healthcare workers, firefighters and EMS. Plus, you’ll get money back after closing from Homes for Heroes, which can also be used for your renovations.
