Home Improvement Loans: Building a Better Future
Your house is a not only the place you call home, but is also a valuable asset. Maintain and improve your home's value through home repairs and home improvements for both personal and financial gain.
Whenever you decide to spend money in home improvements make sure that is helping you to build a better future. A home improvement loan can help you finance your dreams.
Bills.com is presenting you with home improvement loan information so that you can correctly finance your home improvements. Learn about:
- Reasons to do home improvements
- Preparing your finances: Budget and building
- Types of home improvement loans
- Steps to take and steps to avoid when taking a home improvement loan.
Keep in mind that your ability to improve your housing situation is a function of your financial situation. If you are investing in home improvements and repairs make sure that you have sufficient equity and income to carry out the project. If you need a home improvement loan, then learn which type is most appropriate for your financial situation and is affordable.
Reasons to Do Home Improvements
Home improvement loans are available for all types of reasons. Many banks will differentiate between home improvements/remodeling and home repairs. No matter the reason you are fixing up your home, whenever you are deciding to do a home improvement and invest in your home, weigh the costs and benefits between your personal needs and desires against your financial situation.
Here are some examples of home improvements:
- Making a new room
- Creating an home office space
- Building a modern kitchen
- Updating a bathroom
- Putting in a pool and Jacuzzi
- Putting in a garden
Your budget should include provisions for general house repairs. Avoid including everyday expenses into a long-term financing. However, sometimes you will need to carry out major repairs such as:
- Fixing a roof
- Redoing the plumbing or electricity
- Installing new flooring
- Replacing heating and cooling systems
Preparing your Finances: Budget and Building
Before taking a home improvement loan create a financial plan including:
Equity check-up: Check the value of your home. Speak to a local real estate agency about home prices. Ask them what type of home improvements will be more valuable in your area. Remember, conventional loans are available up to LTV (loan to value). If you want higher, then Mortgage Insurance is required and your loan will be more expensive. Some banks will not give home equity loans over 80% of your CLTV (Combined Loan to Value) ratio.
Income Check-up: Prepare your budget. Banks will look at your DTI (debt to income) ratio. You total DTI (including mortgage, property insurance, property taxes, HOA and other monthly debts including student loans, auto loans, and credit card minimum payments) should be around 36% and no more than 45%. Don’t take on more loans and expenses than you can afford. Be especially careful when doing home improvements for personal standard of living reasons, which will not add value to your home.
Research Building Costs and Contractors: Home improvements and repairs are costly. For most of us, it involves skills, which we do not possess. Make sure that you work with professional builders who provide you with guarantees that they will finish their work on schedule and on budget. Get multiple quotes and references before choosing a contractor.
Types of Home Improvement Loans
Depending on your situation, there are different types of home improvement loans available including the following:
- Cash out refinance: If you already have a mortgage loan, with sufficient equity in your house than you can consider a cash-out refinance mortgage loan. This may be a good solution to both lock onto a new better interest rate and/or a longer term on your loan and reduce your monthly payments. The disadvantage of a cash-out refinance is that you pay upfront fees on the entire loan, so make sure that a refinance is a good idea.
- HEL (Home Equity Loan): A Home equity loan is available for those no mortgage on their property or as a second mortgage to those with an existing first mortgage. A HEL is usually offered between 5-20 years as a FRM (fixed rate mortgage), although it is possible to find lenders that offer longer terms and variable rates. Interest rates and fees vary so shop around.
- HELOC (Home Equity Line of Credit): A HELOC is similar to a HEL but instead of receiving one lump sum, you receive a line of credit, which you can draw down as you progress with your improvements. Your interest payment varies based on your fluctuating balance and fluctuating interest rate. You can make payments to bring you balance down and then draw funds again, as you need them. A HELOC is generally offered up to 10 years. A HELOC can be used to pay down other debts or pay for large expenses such as college education. Use a HELOC with care.
- Special Loans: There are special programs such as the FHA 203k loan that are available if you have limited equity and need to include the increased value of your property due to the renovations. Some banks, such as Wells Fargo’s Refinance & Renovate program, offer both FHA and conventional loans as alternatives to long term financing whereby they monitor your home improvement investment into the LTV consideration.
Steps to Take and Steps to Avoid When Taking a Home Improvement Loan
Avoid overextending yourself. Do not take a home improvement loan that you cannot afford.
- Budget carefully. Separate home improvements and repairs that will improve the value of your house from those that don’t, but improve your standard of living. Shop around for you contractor. Make sure that you can afford the monthly payments. Also, make sure that you can afford to repay the loan if you have to move and the housing market is depressed.
Avoid taking a loan that seems cheap now, but has higher costs in the future.
- Choose a loan that meets your budget. Any loan that you take with an adjustable rate or balloon payment carries extra risks. For example, a HELOC carries extra risks. If the bank decides not to extend the line, you will be stuck with a big one-time payment. Plan ahead, and check your equity position. Don’t wait for the last minute to refinance your HELOC.
Avoid taking the high interest loans. Don’t rush into taking an expensive home improvement loan.
- Prepare yourself and Shop around for the best loan. Once you know your credit score, your budget and your debt to income ratio, and your equity position you will be able to speak to lenders about different possibilities.