When you’ve been living in a particular house for long, there comes the time when renovations aren’t just desired, they’re necessary. Whether it’s 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 do 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 difficult to follow, but you need to do your homework. If you’re planning to get a home improvement loan soon, here are the steps to follow:
Know Why You Need the Loan
Besides 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 on the purpose because the more specific you can be, the better you can articulate 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 has a significant purpose. Your confidence regarding the project will only 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 costs. Always add a little extra to the amount requested, because unexpected expenses will arise.
Once you’ve made the mental calculations, be sure of the exact number you will require for the loan. Banks and lenders feel confident lending when the borrower knows exactly how much they need for their home improvement loan.
Additionally, if there’s a part of the renovation that you can pay off in cash, do so. Not only will this reduce the loan amount, but it will also decrease the total interest you need to pay.
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Evaluate Your Equity
Equity refers to the portion of the home that has already been paid off. Getting a home improvement loan is attached to your equity because it’s this equity that becomes the collateral for your loan.
Even if you hold a large 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
Like any other loan, securing a home improvement loan involves the loan officials looking up your credit history. Your credit history states everything from your expenditures to your ability to pay back on time.
Even one black spot on your credit score can cause trouble for you getting the loan. Therefore, before the loan officials have a chance to check, you should look it up yourself to see how it appears.
Ensure there are no miscalculations or discrepancies on your credit report that can hinder you from securing your home improvement loan. If needed, take a few months to do what’s required to improve it 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 requirements vary from institution to institution, certain materials are always necessary.
- Proof of employment
- Documents related to other sources of income
- Tax history
Some banks or lenders will also ask you for the estimate given to you by the contractor. Make sure you have all of these ready when applying for the loan.
To ensure you get the amount you require for your loan, you should attempt to get pre-qualified. You can either become pre-qualified on the phone or online. All you’ll have to do is tell the official about your financial situation (without showing the documents at that time).
Once you are pre-qualified, you must present the required documents to prove that your statements were accurate. After being pre-qualified, you’ll be notified of the maximum amount you can borrow.
After being pre-qualified, it is 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 is often the easier option as you can hand over the documents directly to the person in charge instead of emailing them back and forth.
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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 are in 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 does not require any collateral; therefore, it doesn’t put any of your assets at risk. Attempting to get a secured personal loan is better than going for an unsecured one, as it provides you with a lower interest rate and a more substantial loan amount.
The repayment period 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 allow you to have an unsecured home improvement loan. A peer-to-peer loan is one where numerous investors fund your loan by providing small amounts, and all you have to do are monthly repayments.
Your interest rate will be determined by your credit score, repayment period, and the amount you require to borrow, much like any other loan. These loans tend to have shorter repayment periods so that you can get out of them quicker.
However, the interest rate on a peer-to-peer loan is often higher than that of 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 more extended, making the monthly payment much lower.
The interest rate is lower and possibly 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.
In cash-out refinancing, your existing home loan is replaced by a newer and more substantial 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 and lets you have lower borrowing rates.
Are Home Improvement Loans Tax Deductible?
The Tax Cuts and Jobs Act of 2017, created a lot of changes to what the IRS considers tax-deductible. So what about home improvement loans?
Home improvements on your personal residence, are generally not tax-deductible. Although home improvements contribute to your home’s overall financial investment, the IRS isn’t as excited as you are about your new kitchen.
Fortunately, the interest paid on two types of home improvement loans is still tax-deductible.
- Energy Efficiency Improvements: If you make changes to your home that improve its energy efficiencies, such as installing solar panels, solar water heaters, geothermal heat pumps, small wind turbines, or fuel cell property, you may be able to claim a tax credit on your tax return.
*A tax credit is a reduction of your tax bill by a dollar-for-dollar amount. Sometimes tax credits are refundable.
The Renewable Energy Tax Credit covers energy-saving improvements made before January 1, 2020, and equals 30% of what was installed. Your vacation home is also considered your personal residence.
- Medical Purposes: Home improvements or the installation of specialized equipment for medical reasons, may be tax-deductible. If your renovations are substantial and made to assist a physically-disabled person – yourself, a spouse, or a dependent, then the costs are considered medical expenses.
Examples of substantial improvements are, widening doorways or hallways for wheelchair access, ramps, and modifications to bathrooms or stairs, such as lifts and handrails. As long as these improvements don’t increase the home’s value, their expenses are eligible for a full medical deduction.
Although improvements to your personal residence aren’t tax-deductible, you may be able to cash in on your improvements when you’re ready to sell.
If you sell your home for a profit, you may be able to exclude up to $250,000 of the gain from taxes or up to $500,000 if you’re married and filing jointly.
Tips and Tricks to Stay On Budget
Okay, so you know what improvements you want to make, and now you’ve got the money.
Depending on how extensive your improvements are, there is always a degree of unpredictability to these matters. Things may go wrong, they may take longer than expected, or new problems may arise – all demanding a bit more of the money than you first anticipated. Hopefully, you made room for the unexpected in your budget. Some experts recommend putting 10% – 20% of your budget aside as a contingency fund for the unexpected.
Here are a few tips to keep you on budget:
- Stick with the original plan. Don’t get too creative, mid plan, and start making changes.
- Don’t get lured away by shiny things. The newest and best are hard to resist, but if they weren’t in the original budget – don’t, just don’t.
- Work with experienced, reputable contractors. They’ll know how to keep expenses from getting out of control.
- Pick up, not delivery. Delivery is a convenience that will cost you a lot in additional fees.
- Use repurposed materials wherever you can.
- Sell or donate your discarded elements. You can make a little cash back by selling your old kitchen cabinet, doors, light fixtures, etc. What you can’t sell, donate to charity and claim it on your taxes.
Over time, several tiny adjustments often need to be made around a house. Whether this entails laying new tiles, updating the plumbing system, or even adding a new floor, these all cost a large amount of money.
Home improvement loans can make the difference between an old house and a lush, comfortable home. So if you’re planning to make some changes around your home, research the kind of home improvement loans that best suit your needs, then take the plunge.
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