Home Improvement Loans: Upgrade Your Home With Competitive Financing Solutions

Home improvements can be exciting but financially challenging for homeowners. Thankfully, the US loan market is filled with customized home improvement loans with competitive rates and flexible terms. This gives homeowners the choice of upgrading their existing homes. These home loans cover a range of projects, from bathroom remodeling to kitchen upgrades or energy-efficient home improvements. 

The Total Mortgage team has developed a comprehensive guide on home improvement loans. This guide will help you make an informed decision to prevent financial hassle in the future. It will cover the pros and cons of financing home improvement projects, the types of home improvement loans, home improvement loans vs. HELOCs and home equity loans, and much more. 

Defining a Home Improvement Loan

Unlike a typical home loan, home improvement loans are personal loans that cover home renovations, repairs, and upgrades. These loans come with fixed interest rates and flexible monthly payment options, so you can easily repay the money borrowed from the lender. 

Typically, the amount of these loans can vary between $1,000 and $100,000 or more.  Thus, you can finance major and minor projects, especially if you do not have accessible equity or are unwilling to use your home as collateral. The good thing is that Lines of credit, home equity loans, and HELOCs can also cover home improvements.

Benefits & Drawbacks of Financing Home Improvements

Benefits

• Fixed monthly payments: Loan repayment can be done by making monthly payments. The advantage of this kind of personal loan is that the rate of interest is fixed, so monthly payments are also fixed. 

• Collateral not required: The next distinct advantage is that since these loans are unsecured, you do not require any collateral to guarantee the loan. You can leverage this loan without using your home's equity.

• Funds are available immediately: These loans are available and accessible almost immediately. The loan is approved within a day or two, and you can get the funds within a few working days. On the other hand, HELOCs and home equity loans take months to approve and disburse funds.

• Zero closing costs: This loan can bear an origination fee, but it may not be charged by all lenders. If you choose home equity financing, you may need to pay between 2% and 5% of the value of the loan.

Drawbacks

• Rates of interest are higher: Personal loans for home improvement are unsecured. Therefore, the interest rate is comparatively higher than that of secured loans like HELOCs and home equity loans.

• Origination Fees: In some cases, you will have to pay an origination fee of up to 10% of the loan’s value. The fee can be deducted from the loan proceeds, reducing the funds you receive.

• Creditworthiness: Your credit score and debt-to-income ratios will be scrutinized thoroughly. If your credit score is not up to par, your loan may be rejected, or you may experience higher interest rates on home improvement loans. 

• You get into debt: With a home improvement loan, you get into debt, or if you are already in debt, the load increases. It means your monthly onus of payments increases. 

Types of Home Improvement Loans

Other than unsecured personal loans, there are other ways of funding your home improvement project. If your home has adequate equity, you can also take HELOCs and home equity loans, which can be accessed at better interest rates and repayment terms.

• Home Equity Loan

This loan is a second mortgage offered by credit unions, banks, or other lenders. You can take this loan against the equity of your home. The rates are usually fixed but can vary, too, based on the existing market conditions. The borrowing limit is between 80% and 85% of the value of your home. The repayment term is fixed, and the loan balance needs to be paid in equal monthly installments along with the original mortgage.

• Home Equity Line of Credit

HELOC, or Home Equity Line of Credit, lets the homeowner borrow money over a specified draw period and pay it back at a variable interest rate. HELOCs are valued between 80% and 85% of the home’s equity. This form of loan is a good alternative where the final home improvement project cost can vary. You are only required to pay interest on the borrowed amount.

While secured options to finance home improvements are great options, they also have drawbacks. HELOCs and home equity loans will need the homeowners to complete the closing process as well as get a home appraisal done. This can lead to delayed disbursement of funds by a few weeks or even months. And, let’s not forget that these financing options are available at a stake of your home, which means you could lose your sweet home if you’re unable to repay the loans. 

Comparing Home Improvement Loans & Home Equity Loans/HELOCs

 

Features	Personal Loans	HELOCS & Home Equity Loans
Loan amount	The loan offered is up to $100,000. In some cases, even higher loan amounts can be offered.	The loan is between 80% and 85% of your home’s equity.
Repayment Term	The term is mostly between 1-12 years.	HELOCS: 5-20 years Home equity loans: up to 30 years
Creditworthiness	In most cases, the minimum credit score required is 620. However, some lenders may also offer loans to individuals with lower credit scores.	The credit score required is mostly more than 620, but there could be stricter requirements.
Interest Rates	The rate is usually between 6% and 36%, depending on the borrower's creditworthiness. Interest rates are mostly fixed.	The interest rate is between 5% and 15% based on the market conditions. HELOC rates vary and Home Equity loan rates are fixed.
Origination Fees/Closing costs	It is usually between 1% to 10% of the borrowed amount. However, in many cases, there are no fees.	losing costs are between 2% and 5% of the amount borrowed. In certain cases, the chargers offered by some lenders may be less.
Duration of Loan funding	The funds are usually transferred the next working day after the approval. In certain cases, same-day funding is also offered.	In most cases, the loan amount gets approved between 2 weeks and 2 months. This includes closing and underwriting tasks.
Collateral	No collateral is required. Zero risks of losing your home in case of non-repayment of the loan.	Your home is the security in these loans. In other words, you can lose your home if you are unable to repay the loan.

 

Current Home Improvement Loan Rates

Usually, the interest rate on your home improvement loan varies depending on the loan type you choose. Unsecured personal loans generally have a higher interest rate than home equity loans. If your credit score is excellent, you may be eligible for competitive interest rates on a personal loan for home improvement projects.

The current rates are as follows -

• As per Federal Reserve, the average interest rate on a 2-year personal loan is 12.35%. 

• As of July 31st, the average HELOC rate is 9.18%. The rate is based on a FICO score of 700 and an 80% loan-to-value ratio.

• If the loan repayment term is longer, the interest rate can be higher.

• The interest rates can be higher if your creditworthiness is terrible or fair.

• For a HELOC, the interest rates can vary with time.

• The interest rates on personal and home equity loans are fixed and stay constant throughout the loan repayment period.

 

Obtaining a Home Improvement Loan

• Check your eligibility. You will need a FICO credit score of 620 or above to get approval for a home improvement loan. The higher the credit score, the lower the interest rate. You need to assess the credit report to understand if there are errors. You must evaluate how to pay the debt before applying for an improvement loan.

• Understand the amount to be borrowed. Evaluate the project for home improvement to help understand the potential total costs. This is a critical step. If you borrow less funds, you may run out of money. When you borrow a higher amount, you will have to pay interest on the excess money that you didn't need.

• Consider the loan term. You also need to pick the loan term that is comfortable for you. Remember, when the loan term is longer, the monthly payments are lower, but this can be an expensive option due to higher accumulated interest charges. Choose a longer term if you are choosing a project that will take a long time to complete, like adding a roof or a room. Shorter terms attract a higher monthly payment, but the debt gets over faster. Choose short-term loans for minor projects.

• Prequalification of the loan. Lenders offering personal loans will conduct a soft credit inquiry to weigh the chances of an approval. This analysis also helps them rate and estimate the term of the loan. Prequalification with different lenders is a good option, as you can compare rates and other terms. However, there could be some rate difference when you formally fill out the loan application, as the lenders will take you through a hard credit check.

• Loan application. Now is the time to pick the right loan and finalize the details. Compare the loan amount, interest rates, loan duration, repayment terms, etc.

Conclusion

Home improvement loans are valuable financing options that help with home repair, renovation, and upgrades. The different types of loans need to be considered by the homeowner so that the journey becomes easy and seamless. With the right home improvement loan, your goals for a home upgrade can be accomplished affordably and efficiently.

If you need expert help evaluating all options and being guided to make the right choice, contact Total Mortgage.