Interested in getting a loan for home improvements? Here’s what to look for and what to avoid.
If don’t have the money to finance this investment, you can consider a home improvement loan to cover the costs. In this guide, we’ll take you through some of the financing options available and what you need to know to find a home improvement loan that’s right for you.
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How does a home improvement loan work?
Depending on the type of changes or updates you want to make on your property, there’s a variety of loans available for home improvements. These loans all have key features and differences, so it’s important to compare your options to find the best one to suit your needs and situation.
- Secured or unsecured. If you have some equity in your house, you can consider getting a home equity loan. This option uses your home equity as collateral for the money you borrow. If you don’t have enough equity in your home, or if you don’t want to use it as collateral, you can get an unsecured loan.
- Fixed or variable rate. Providers of home improvement loans may offer you a choice between a fixed and variable (or “floating”) interest rate. With fixed rate loans, your repayments remain the same throughout the loan term. If you opt for a variable rate loan, your rate may start lower but can fluctuate over the life of your loan. The interest rate for variable rate loans depend on either the Prime Index or the London Interbank Offered Rate (LIBOR). Check if your bank has a cap for how high your variable rate can climb.
- Protection against losses. If you have limited equity in your home, you can think about getting a National Housing Act authorized FHA Title I loan. With these loans, FHA insures lenders against possible losses.
Features to consider when exploring home improvement loans
If you’re interested in getting a loan for home improvements, make sure you consider the following factors:
- Security. You need to have enough equity in your home to get a secured loan. Alternatively, you may be able to use a vehicle as security for the loan, providing the value of the car is sufficient. You can also apply for an unsecured loan.
- Interest rate. This is the amount of interest you will pay on the money you have borrowed for your home improvements. Secured loans tend to come with lower interest rates than unsecured loans because it’s less of a risk for the lender. Interest rates can vary even with these kind of loans, so paying attention to this aspect is crucial. Some lenders offer interest rate discounts if you sign up for automatic repayments.
- Loan term. A longer loan term will give you lower ongoing repayments, but at the end of the loan term you will have paid more interest. This adds to the overall cost of getting the loan. In contrast, higher repayments and a shorter loan term help keep the overall cost of the loan down.
- Processing time. Depending on the kind of credit you’re looking for, you can receive your loan funds one business day from approval, but in some cases the process may take a week or more.
The benefits and drawbacks of getting finance for home improvements
- Carry out time-sensitive repairs. A home improvement loan lets you carry out repairs as soon as possible. Postponing repair work until you’ve saved the money can result in more damage, which can also lead to more expensive repairs.
- Various loan options. No matter what type of home improvement you’re looking at doing, you have a range of loan options to choose from. These include home equity loans, home equity lines of credit, unsecured or secured personal loans and personal lines of credit.
- Taking on too much debt. If you apply for a loan you can’t afford to pay off, you run the risk of taking on debt you can’t manage. Make sure you budget for your repayments based on your financial situation before you apply.
- Finance doesn’t account for renovation budgets or schedule changes. If anything happens that affects the budget or schedule of your renovations, it could impact on your ability to make loan repayments. Make sure you leave room to move in your budget so that you can still make repayments if anything unexpected happens and you need extra funds.
Is there anything to avoid when deciding on your loan?
Unplanned or poorly considered renovation projects should be avoided at all costs. This is especially true if you’re planning to finance it with a loan. Home improvements often involve long and expensive processes, and you need to be financially prepared to cover it.
If you think you may have problems in repaying the loan, avoid taking it. If you don’t make your repayments on time, your credit score will be negatively affected – and if your loan is secured you could lose your home.
Frequently asked questions
What is the difference between a home improvement loan and line of credit?
With a home improvement loan, you receive all of the funds as a lump sum payment. You then have to pay interest towards the entire amount borrowed.
A line of credit gives you access to a credit limit. You’re then able to draw on the funds up to that limit when you pay for your renovations. You only pay interest on the funds you use, and if you make repayments on your credit limit, you can then use those funds again.
Can I get a home improvement loan if I have poor creditworthiness?
Home improvement loans are available for people with low credit scores. However, you might have a better chance of being approved if you apply for a secured loan.
How can I apply for a home improvement loan?
Most banks and credit unions in the US provide home improvement loans. You can start by comparing some of your options on the page above. Once you find a loan you’re eligible for and that you want to apply for, click “Go to Site” to complete and submit your application.
Can I use a home improvement loan on my vacation rental?
A home improvement loan can be used for either your investment property or your primary place of residence. According to Trip Advisor Vacation Rentals, simple improvements can help your place stand out from the pack to bring in ample return on investment. Check out their suggested tips on best upgrades for your vacation property.