Are you thinking about remodeling your home? There are a lot of home improvement loan options that can make remodeling more affordable, no matter how big or small your plans are for the renovation changes. Home renovation loans can be used for anything from adding an addition, building a pool, or updating the kitchen. The changes are up to you, but you should know what to expect before you sign your new home improvement loan!
Understanding the Types of Home Remodeling Loans
There are two types of home remodeling loans and you should understand both of them before committing to any debt. One type of home remodeling loan uses the equity in your home while the other requires a down payment. The most common types of home improvement loans involve using your own home equity as collateral. These types of loans generally lead to the largest amount borrowed, so they’re ideal for larger projects. In order to qualify for a home equity remodeling loan, you’ll need a fairly large amount of equity already in your home.
Another home improvement loan option is to make a down payment on the loan. If you’re unable to use the equity in your home because you don’t have a large enough amount or you need a smaller loan, you can provide a down payment. It’s important to recognize that these types of loans that don’t involve using your home equity as collateral will result in a smaller loan with a higher interest rate so they are not ideal for larger projects.
Finding the Right Home Improvement Loan
When looking for a home improvement alone, it’s smart to shop around. Most first-time homeowners immediately go to their mortgage lender for home improvement loans, but this might not be the best option for this type of loan. Compare with several loan lenders to ensure you’re getting the right option for your project. Because credit bureaus lump similar applications together as a single inquiry, you don’t have to worry about hurting your credit score by applying for several remodeling loans to receive quotes.
How Do You Qualify?
You’ve decided a home remodeling loan is right for your project. How do you get started? You’ll need to qualify with your chosen lender to be considered for a home improvement loan. First, you’ll need a solid credit score and a comfortable monthly income. Remember you’ll be adding an additional payment to your monthly debts, so you need to be comfortably able to afford this new expense. If you opt to use your home equity as collateral, you’ll need an appraisal of your home. This amount in addition to the terms of your mortgage will be used to determine the worth for the lender.
When is a Home Improvement Loan the Wrong Choice?
Home improvement loans can add value to your home and increase its livability! That being said, there are some instances when it’s not the right option. You’ll need to consider your particular goals and future plans for yourself and your home before you continue with a home improvement loan. First, are you planning on staying in your home or selling it in the next few years? If you’re planning on selling soon, having a home improvement loan will take away from your profit in the sale.
Similarly, if you’re planning to refinance your home, having a home improvement loan will make it more challenging. When refinancing, the home improvement loan lender would need to agree to subordinate the loan which might not be possible. Ultimately, you should always speak to a qualified financial advisor before taking on a large financial undertaking.
Home improvement or renovation loans are a great way to achieve the home of your dreams! You need to be smart with your loan by shopping around for the best quote and considering your plans. Speak to your mortgage lender or a financial specialist about your loan options to get started!