When you’ve been living in a particular house for long, there comes the point when renovations aren’t just desired, they’re necessary. Be it minor repairs, major upgrades, or a complete remodeling, all of it takes a lot of time, money, and effort.
This is where home improvement loans come in. Whether you wish to make your home more energy-efficient or just change the old plumbing, home improvement loans help you out with all of it.
With these loans offering several ways of repayment and credit card companies providing better rates, getting a home improvement loan is a wise option to consider if you’re planning to make a few changes around the house.
Related article: Reasons to Refinance Your Home
Getting a Home Improvement Loan
A home improvement loan is when you borrow money from a bank, lender, or any other financial institution based on their loan terms to upgrade your property.
Home improvement loans are different from home refinance loans since the latter is more prolonged, not open-ended, and the loan amount is usually higher in those situations.
The steps to securing a home improvement loan aren’t that tough to follow, but you definitely need to do your homework. If you’re planning to get a home improvement loan soon, here are the steps to remember and follow:
Be Aware of Why You Need the Loan
In addition to knowing what you need the home improvement loan for, it’s essential to explain it to the bank or lender as well. Be very clear of the purpose, because the more specific you can be, the better you can to elucidate it.
For example, if you need the loan to add a new patio, explain it’s value. The bank or lender needs to know that this money is for a substantial purpose, and your confidence regarding its completion is going to increase your chances of acquiring the loan.
Know the Amount Required
When calculating the amount required, you’ll have to consider various factors and the associated charges. Always keep a little extra amount in mind, because unexpected expenses will definitely crop up.
However, once you’re done making the mental additions, be sure of the exact number you’d require for the loan. Banks and lenders feel confident when an individual knows exactly how much they need for their home improvement loan.
Additionally, if there’s a part of the renovation that you think you can pay off by cash, do so. Not only will this reduce the amount of the loan, but it will also decrease the total interest you need to pay.
Evaluate Your Equity
Equity refers to the portion of the home that has already been paid for. Getting a home improvement loan is heavily tied to your equity because it’s this equity that becomes the collateral for your loan.
Even if you hold a good amount of equity, you still need to prove that you’re financially stable enough to pay off your loan. The final terms of your loan will be set based on your ability to pay it back on time.
Look Up Your Credit History
Much like any other loan, securing a home improvement loan entails the officials looking up your credit history. Your credit history states everything from your expenditure to your ability to pay back on time.
One black spot on your credit score can cause trouble in you getting the loan. Therefore, before they get a chance to do so, you should look it up yourself to see how your changes appear.
Make sure that there are no miscalculations or discrepancies on your credit report that can prohibit you from securing your home improvement loan. If needed, take a few months to shore it up a little before applying.
Related Video: How Does My Score Impact My Loan
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Keep the Necessary Documents Ready
When attempting to get a home improvement loan, there are several documents that you will need to present. While the exact requirement often varies from institution to institution, certain materials are pretty constant.
Namely: proof of employment, papers related to any other sources of income, the history of your taxes, and so on. Some banks or lenders can also ask you to provide an estimate given to you by your contractor. See to it that you have all of this ready when applying for the loan.
Try to Get Pre-Qualified
To ensure you get the amount you require for your loan, you can try to get pre-qualified. You can either get pre-qualified on the phone or online. All you’ll have to do is tell them about your financial situation (without having to hand over the document that very moment).
Once you get pre-qualified, you have to present the required documents to prove that your statements were accurate. After getting pre-qualified, you’ll be notified of the maximum amount you can borrow.
Getting a Pre-Approval
After getting pre-qualified comes getting pre-approved. This implies formally applying for the loan and presenting the required documents. You can often apply for a home improvement loan online.
However, if you’re asking for the loan from an institution nearby, you’ll probably have to apply onsite. That often serves as the easier option as you can hand over the documents directly to the person who is in charge, instead of having to email them back and forth.
Types of Home Improvement Loans
There are different types of home improvement loans that exist, and you need to be aware of them to know which one best suits your needs. Here are the different ones you can choose from:
Traditional Home Improvement Loan
This is the kind of home improvement loan where you borrow a certain amount from a bank or any other institution, and the interest rate depends on your credit score, the amount you’re borrowing, and the loan term.
These come under the category of unsecured loans, since you don’t have to pay any collateral, and the interest rate is higher when compared to the secured loans.
Related: What is Loan Collateral?
A personal loan, too, does not require any collateral, and neither does it put any of your assets at risk. Going for a secured personal loan is better than going for an unsecured one, as it provides you with a lower interest rate as well as a more substantial loan amount.
The period of repayment for a personal loan is usually shorter than that of a home equity loan as a result of which you pay lesser interest over time.
These kinds of loans let you have an unsecured home improvement loan. What happens with a peer-to-peer loan is that numerous investors fund your loan by providing small amounts, and all you have to do are monthly repayments.
Your interest rate will be attached to your credit score, repayment period, and the amount you require to borrow, much like any other kind of loan. These loans tend to have shorter repayment periods so that you can get out of them quicker.
The interest rate on a peer-to-peer loan, however, is often higher than other kinds of home improvement loans.
Home Equity Loan
A home equity loan is one of the most popular kinds of home improvement loans. Their repayment period is usually longer, making the monthly payment much lower.
The interest rate is lower and often tax-deductible. However, since you can take longer to repay a home equity loan, the interest can cost you more than a short-term loan that has a higher interest rate.
In cash-out refinancing, your existing home loan is replaced with a newer and larger loan. What you get as a homeowner is the difference in cash between your old loan and the new loan.
With a cash-out refinance, it takes you longer to pay off the amount but also lets you have access to lower borrowing rates.
Over time, several tiny adjustments often need to be made around a house. Be it getting new tiles, changing the plumbing system, or even adding a new floor, all of it takes a lot of money that one doesn’t always have ready.
Home improvement loans can make the difference between an old house and a lush home. So if you’re planning to make some changes around your home, look up the kind of home improvement loans that will suit your needs the most, and take the plunge.
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