The Ins and Outs of Home Improvement Loans: What You Need to Know
RH Business Marketing Solutions
Owning and maintaining a home is one of the most significant investments of any individual’s life, and there’s no doubt about eventual expenditures on home improvements.
While most homebuyers are commonly aware of personal loans as an option to finance their home improvements, other types like HELOCs and home equity loans exist.
So, if you’re planning a home remodeling project and wondering how you can finance it, this article explains the details of the loans available in the market.
What Is A Home Improvement Loan?
A home improvement loan helps finance a wide rand of home expenses and improvement projects ranging from full-scale renovations to touching up one single room.
Home upgrades don’t just improve the quality of your house but also make for a good investment, considering it can increase your property’s value. However, these costs could easily accumulate into four to five-figure bills; that’s where you can leverage these loans.
Uses Of Home Improvement Loans
Home improvements can involve cheap and pricey expenses, so you must know the total cost estimate to ensure you get all the funds through the project.
Here’s a brief list of projects homeowners can use a home improvement loan for and an average range of how much it would cost:
● Minor kitchen remodeling: $14,000 - $26,000
● Major kitchen remodeling: $40,000 - $65,000
● Roof replacement for average-sized home: $6,700 - $11,500
● Premium quality roof replacement: $24,000 - $50,000
● Moderate remodeling of a single room: $7,500 - $12,700
● Moderate renovation for a kitchen: $6,550 - $11,950
● Moderate renovation for a bathroom: $2,600 - $8,600
● Adding a new 400 sq. ft. room: $32,000 – $80,000
● Replacing an interior door: $225 - $825
● Replacing an external door: $500 to $1,900
● Front door replacement: $650 to $3,700
● Adding a single-car attached garage: $10,500 - $20,400
● Furnishing a single bedroom: $1910 - $3600
● Furnishing an entire medium-sized house: $10,000 - $60,000
Types Of Home Improvement Loans
1. Personal Loans
These are the most common types of home improvement loans because you can use them for almost anything. You can also get personal loans through traditional sources like banks and online lenders or apps like solo funds.
Since a personal loan is an unsecured debt, it’s not tied up to any collateral, which means if you default on paying the loan, the lender cannot take your house or anything, although it can ruin your credit score. However, lenders may charge higher interest rates because of the repayment risk.
It’s pretty simple to get a personal loan, and you get the money quickly, usually within a day or two. You’ll receive the lumpsum amount, so these loans are ideal for contractor-based projects requiring simultaneous payments.
2. Home Equity Loan
Home equity loans are also common for home renovation, but unlike personal loans, these are secured, which means they use your home’s equity as collateral. Defaulting this loan would legally allow the lender to take your home away.
Understanding how equity works and how you can use it is tricky, but in simple terms, it refers to how much of your home you own (the amount of the mortgage you’ve already paid). You are allowed to borrow up to 85% of this equity.
Taking a home equity loan is as good as having a second mortgage on your house, so getting it’s a bit more complex. You’ll have to go through a more rigorous underwriting process that could include home inspection and closing processcosts, so make sure you discuss your options.
3. Home Equity Line of Credit (HELOCs)
A home equity line of credit is like a combination of having a home equity loan and a credit card because HELOC lenders allow only a limited amount of money as and when needed; this may mean that your payment might change.
It’s a great option if you’re doing home renovations over time because you’re not paying to borrow money you don’t need. HELOCs are also secured loans; your home will be used as collateral.
Lenders usually prefer you to have at least 20% of your home equity to be eligible for the loan. Like home equity loans, HELOCs allow you to borrow up to 85% of your home’s value and have a lengthy, time-consuming underwriting process.
Choosing The Right Home Improvement Loan
Before taking out a loan, discussing it with a financial advisor is advisable, especially if the loan amount you want is quite a lot. To get an idea of which loan is suitable for you, here are some factors to consider:
“Do I have to save money?”
Interest rates can compromise your finances. While home equity loans and HELOCs have low interest rates, unlike personal loans, they often come with added expenditures like closing costs.
“Do I need quick cash?”
Personal loans are a better option if this is the case because you will get the money much faster compared to the other options.
“Do I have equity in my home?”
You simply cannot get home equity loans and HELOCs if you don’t have any equity, so your only option is to take out a personal loan or find other alternatives.
“Do I have good credit?”
Getting an unsecured personal loan with bad credit can be challenging, so if your credit isn’t great, you’ll have a better chance with home equity loans and HELOCs.
“Do I need money in lumpsum?”
Personal and home equity loans are good if you want lump sum cash to finish off projects in one go, but if it’s a gradual process, HELOC is the better option.
Alternatives To Home Improvement Loans
Cash Out or Mortgage Refinance
Choosing a mortgage refinance can lower your interest rate on monthly mortgage payments if the amount you’re paying is higher than the current market rates; this can free up some cash for your renovations.
Similarly, cash-out refinance allows you to refinance your home’s equity for a higher amount than what you owe on your mortgage while paying you the remainder in cash. For example, if you owe $100,000 on your mortgage and refinance it with a new $150,000 mortgage, you’ll receive $50,000 in cash.
0% APR Credit Card
Using a credit card for home improvements might be a risky strategy, but if you use the right credit card, it can work. That’s why using credit cards with a 0% APR introductory period lasting 12 - 21 months works best.
Be cautious about how much you borrow, and limit yourself to what you’re confident about paying off in full within the interest-free period, making this a safe option for minor home upgrades or repairs.
To Conclude:
Whether you need to repair a damaged pipeline or upgrade the interiors of your living room, it’s a good decision for your home’s overall maintenance and value. This way, you’re not just living in a house you love, but you’re also protecting the investment you made.