How to Get a Home Improvement Loan
If you’re thinking about making some major improvements to your property, you’re not alone. Home renovations have been booming this year, as most people have been spending more time than ever at home. So if you’re thinking about remodeling your kitchen or putting in a pool, this is probably the perfect time to do it! But what’s the best way to pay for it? Well, if you don’t have money saved for your project and you don’t want to use a credit card, it may be best to get a loan specifically for improving your house. If you’re not familiar with this type of financing, here’s what you need to know about how to get a home improvement loan.
Know the Loans Available to You
Before you can apply for a loan, you need to know the top ways to finance home improvements. The following are the most common ways to do so.
Home Equity Loan
One type of loan to consider is a home equity loan. This allows you to use your home as collateral in exchange for a lump sum that you’ll get now. You’ll just have to pay back the loan over anywhere from 5 to 30 years, depending on your repayment terms.
The advantages of this type of loan including the ability to get a lot of money at once to pay for a project, along with a fixed interest rate so your monthly payments are the same for the life of the loan. And since you’re using your home equity as collateral, you can typically get a lower interest rate than you would on unsecured personal loans.
Of course, to get this type of loan, you have to have equity in your home, so it’s not an option for all homeowners. And since your home is your collateral, you could be foreclosed on if you can no longer afford the payments. Plus, you’ll have to pay an origination fee and additional closing costs on the loan, so it’s not the right choice for very small, inexpensive projects.
Home Equity Line of Credit
Another option is a home equity line of credit (HELOC). Like home equity loans, you need to have equity in your home to qualify for this type of home improvement financing. But one difference is that you can continually take out the amount you need for your project. This makes it a good option if you have an ongoing project and you’re not sure how much the total will be, as a HELOC is like a credit card you can keep using.
The main advantage of a HELOC is flexibility, since you won’t need to ask for a specific lump sum. Instead, you can borrow the amount you need up to the pre-approved limit, repay that amount, and then borrow more money as needed. And if you pay it all off and carry zero balance, you’ll only have to pay the interest on the amount you haven’t paid back yet, not the entire line of credit. In addition, your HELOC will have either minimal or zero closing costs.
Just keep in mind that like home equity loans, your home is the collateral, so you could be foreclosed on if you don’t pay off your HELOC according to the repayment terms. But unlike home equity loans, the interest rate on your HELOC will be variable rather than fixed, so your payments could increase depending on the market. Plus, home equity isn’t enough to qualify you for a HELOC. Your income and credit score will also play a role in how much you can borrow, so check your credit report before applying. If you no longer have good credit in the future, your lender could reduce the amount you can borrow and change your loan terms.
Cash Out Refinance
Another option to know about before learning how to get a home improvement loan is a cash out refinance. With this type of funding, you have to apply for a new mortgage loan that’s higher than the amount you still owe. This will replace your current mortgage loan, as you’ll use the money you get from the refinance to pay it off. Then you can use the remaining money any way you want.
One of the main benefits of a cash out refinance is that you can spend the money on anything, not just home improvements. And since you’re getting a whole new loan, you could end up with a lower interest rate than you currently have, depending on the market. You can also change your loan term if you’d like, going from a 30-year to a 15-year term or vice versa.
However, a cash out refinance does have some drawbacks. For instance, since you’re applying for a new loan, you have to pay for an appraisal, loan origination fees, closing costs, and other upfront expenses, much like you probably did with your old home loan. And unless you’re refinancing to a shorter term, you’re likely adding years to your loan, so it will take you longer to pay off your house. Plus, your new payment will be higher than your old one.
Make Sure Your Credit Score Is Good Enough
Now that you know the kind of financing you can choose from, you should learn about the next step in how to get a home improvement loan. And that’s making sure your credit score is high enough. After all, your credit history and score will figure in when it comes to whether you’re approved, how much you’re approved for, and what your interest rate is.
In general, the higher your score, the better! So if you have a 740 or higher, you have a good chance of being approved for a high amount at a good interest rate. If your score is lower—such as mid-600s—it’s possible you’ll also get some loan offers. But the interest rate may be higher than you’d like, and the amount you’re approved for might not cover all your costs. So it’s best to go into this process with an impressive credit score if you want the ideal home improvement loan.
Find Out How Much Equity You Have
Whether you apply for a home equity loan, HELOC, or cash out refinance, the amount you’ll get all depends on how much equity you have in your house. To find out this amount, you will have to get an appraisal on your home.
Ask the loan officer you plan to work with if this step is required. If it is, be ready to set up an appointment with an appraiser before you complete the application for a home improvement loan.
Get Estimates to Determine How Much You Need to Borrow
One of the best tips from experts on how to get a home improvement loan is to ask for a specific amount of money. When you’re sure of the amount you want—and have a list of all the little costs that add up to the total—lenders are more likely to approve your loan because you’ve clearly done your research.
Of course, you don’t want to just throw out a random number. You need to have a good estimate of how much it’s going to cost to complete your project. To do this, ask for estimates from local contractors, preferably from at least three companies. This way, you not only have a good idea of how much you need to borrow, but you also know which contractor is offering the best price.
Gather the Documents Requested by the Lender
In-person and online lenders alike will require paperwork from you before approving your loan request. For this type of loan, you’ll first need to show proof of income, such as W-2s for the last month—or tax returns for the last two years if you’re self-employed.
You’ll also need the appraisal results if you already had that done. And if you have proof of estimates that state how much the project will cost, present that for a better chance of getting a home improvement loan.
Compare Interest Rates on Loans
The final step in how to get a home improvement loan is comparing the loans you’re interested in. After all, you might be able to get approved for a few types of loans from different lenders. In this case, you’ll need to compare them all before you choose the one that’s right for you, and one of the simplest ways to do this is to look at the interest rates.
Typically, the one with the lowest rate is best. But before you accept that one, check for any added fees or possible drawbacks that the other loans don’t have. Once you’re certain it’s the right home improvement loan for your needs, you should be ready to accept it and start your project!
If the reason you want to improve your home—whether by putting in hardwood floors or fixing up your kitchen—is because you’re hoping to sell it soon, LemonBrew can help! When you reach out to us, we can match you with a Partner Agent and then work with you on everything from securing funding to getting title insurance, so feel free to contact us today.