After several years in your home, the question of home improvements is bound to come up. Sometimes it is due to necessary repairs and maintenance. For others, it is a great way to add value to your property. Unfortunately, these improvements often come with a steep price tag. If you are looking for ways to fund your projects, here is how to obtain a home improvement loan to help you update your house.
The Prep Work to Obtain a Home Improvement Loan
Before you set a meeting with a bank or lender, you should know what to expect. This includes knowing what questions they will ask and having the necessary documentation in hand.
The first thing any lender will do is run a credit check. You can do this beforehand by running a ‘soft’ credit check through Experian. If you know what your current score is, then you will have a better idea what loan options the bank or lender can offer you.
Next, the lender will ask for income verification to ensure you can repay the loan. So, take some time to prepare the documents like pay stubs, W-2s, or recent tax return for the self-employed. If you have an appraisal of your home and the projected cost of the project, it will also present you as a more favorable applicant.
Types of Home Improvement Loans
The scale and financial needs of your project will also affect which loans are available to you. Your financial health will also greatly affect the interest rates and terms offered. Here are the most common types of home improvement loans.
Unsecured Personal Loans
With an unsecured loan, you do not need to provide collateral to secure the loan. The interest rates the lender can offer you will depend on your credit score. However, once approved the funding comes quickly once you agree to the terms. Often times, you can have the money in your account within the same day. Unsecured home improvement loans usually have a shorter repayment period, lower amounts, and fewer fees than secured loans. However, they will also have higher rates, especially if you have a low credit score.
Home Equity Loans
This loan is more commonly referred to as a second mortgage because you are borrowing against the value of your home. The loan is paid as one lump sum that you repay over a longer period of time in fixed monthly installments. The benefit of getting this type of home improvement loan is that you never have to worry about market fluctuations affecting your interest rates. The greatest concern is that if you get too far behind in your payments, your home could be at risk for foreclosure.
Home Equity Lines of Credit (HELOC)
This secured loan is a popular option for home improvement projects because they usually offer lower interest rates than unsecured loans. A home equity line of credit, or HELOC, is a revolving credit which allows you to take money as needed. Although they provide greater flexibility, they are subject to variable interest rates. Furthermore, you must use your home as collateral meaning you could be in trouble if you are unable to make your monthly payments.
The Best Home Improvement Loan for You
Before undertaking any new renovation or maintenance projects, take stock of your financial situation. Ensure that you are ready to take on the responsibility of an additional monthly payment. If it is stretching your budget beyond your means, ask yourself just how necessary it is. Obtaining a home improvement loan is a huge financial commitment that may require you to borrow against the equity in your home. Take the time to consider all your loan and refinancing options. Choose the one best suited for your project and budget.