How to Navigate Home Improvement Financing

Applying for home improvement financing can be complicated. There are a lot more options than there used to be, which means if you know what you’re doing you’re more likely to get exactly what you need. The downside is that sorting through the possibilities can be overwhelming and downright confusing. Learn more about the home improvement financing options available below so you can be sure you’re making the right choice.

What Loan Options Are Available?

There are several home improvement financing options to choose from depending on your current financial situation and resources.

  • Home-Equity Loans: With a home-equity loan you borrow up to the total of your home’s equity amount and receive a lump sum to be used toward home improvement projects.
  • Home-Equity Lines of Credit (HELOC): With a HELOC you can borrow up to the total of your home’s equity amount, but instead of a lump sum like a home-equity loan, you open a line of credit and can spend up to that amount little by little.
  • Traditional Mortgages: This method allows you to combine the amount of your loan with your current mortgage. Refinancing your mortgage is a great option if you are able to get a better interest rate than the one you already have.
  • Energy-Efficient Mortgages: If your home meets certain energy efficiency standards, you may qualify for an energy-efficient mortgage.
    B and C Loans: These are often used as debt consolidation tools and are easier to get approved for, but they are often unpredictable or have high interest rates.
  • Personal Collateral: If you have assets you can put up as collateral, or a really great credit score, this may be a good option for you.
  • Other Collateral: Stocks, bonds, savings, and even retirement accounts can be accessed as a form of home improvement financing.

How Much Can I Borrow?

How much you can borrow depends on your credit score, loan-to-value ratio, and your income. It’s helpful to map out exactly what you’ll be purchasing and how much it will cost, then add about 30%. Bring this information to your meeting with your lender to get a loan estimate. You’ll need to request a definite amount and this will help determine what that is.

Important Terms to Know

  • Credit Rating – an assigned number based on debt and payment history
  • Loan-to-Value Ratio – a percentage of the appraisal value of your home
  • Interest Rates – the percentage of the total you will pay each month in addition to the payment
  • Adjustable-rate mortgage(ARM) – an ARM can get you a low interest rate, but it also can change frequently and unexpectedly
  • Loan Term – the total length of the loan; a longer term means a lower monthly payment, but more total interest paid over the life of the loan
  • Points – interest paid in advance; each point is equal to 1% of the loan
  • APR – Annual Percentage Rate
  • Closing Costs – Fees paid upfront and not included in the loan, such as appraisals and title insurance
  • PITI – Principal, Interest, Taxes, and Insurance
  • PMI – Private Mortgage Insurance

Your Rights as a Borrower

Lenders are required to disclose interest rates, terms, costs, and variable rates. If they do not disclose the APR or it changes before you close, you can opt out and have your application fees returned. You also have 3 days after closing to inform the lender if you decide to cancel the loan.

Some financial institutions like specialize in home improvement finance and can help you learn more about home improvement finance options. Don’t let home improvement financing issues hold you back. You have a lot of options available and a lot of rights to protect you during the process. Knowing about both will help you make smarter decisions, and help you get the loan you need.

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