Home improvements are meant to add value to your property and make it comfortable. But if you don’t have sufficient funds in your savings account to cater for the renovation, you have to figure out how the project will be financed. Of course, the amount of money you spend depends on your budget and preferences.
It is beneficial to pay cash for home renovations but this might not be possible for everyone. Since a home is a valuable investment, there are tons of loans to help you handle the expenses. Nevertheless, not all options are created equal and you need to understand what you are getting into.
Home equity loans
Normally, this is a second mortgage that gives you a predetermined amount of money and your home backs it. The loan is paid back in monthly installments and if you don’t adhere to the loan agreements, you are likely to face foreclosure.
Most lenders are willing to give you up to 85% of your current home value but it’s not rare to come across a lender who is willing to give you 100% of your home value. For instance, if your mortgage was $250,000 and you’ve paid back $60,000; your current balance is $190,000 but the equity is $60,000 assuming the property value hasn’t changed. If you sought another loan, you would be eligible to borrow up to $212,500 which is 85% of your home value. But when you consider your current balance, you have about $22,500 to borrow. However, the actual amount is also influenced by factors such as credit history and income.
More often than not, the interests charged on these loans don’t change, hence the amount you pay each month will be constant. Nevertheless, the rates for home equity loans tend to be higher than normal mortgage loans and they are also dependent on the mortgage balance, income and credit profile. Since most lenders include closing fees, the amount is added to the loan balance. Insurance and title search fees can be quite high but if you are requesting a home equity loan from a lender you had worked with, it’s possible to ask for a reissue rate.
Cash out refinance
Cash out refinance is a type of loan where you swap your current mortgage with a larger loan amount. While you may not have the opportunity to take the money in your hands, it is always available to compensate the contractor.
For instance, if your current balance on the mortgage loan is about $200,000 but the value of your home is $450,000, you can qualify to get $300,000. As such, you will afford to clear your previous balance and have $100,000 for renovations. Nevertheless, the exact amount you can get will be highly determined by several factors like credit profile and home equity. Under normal circumstances, you can take up to 855 of your home value.
If you intend to get more than 80% of the current home value, you may be required to pay for mortgage insurance. However, cash out refinance loans tend to have better interest rates than home equity loans. Most people prefer this option because it leaves you with one loan to deal with and you can get the funds quickly.
A personal loan is normally unsecured hence you don’t have to use your home as collateral and your credit scores influence the exact interest rates. Most personal loans come with predetermined interests and this means you can plan your payments. Unlike secured loans where the loan term can extend up to 30 years, personal loans are meant to be paid back in 2-5 years.
The amounts available are up to $50,000, and if your credit profile is outstanding, you may get better interest rates. Nevertheless, since this is an unsecured loan, the interests are higher than you can get with secured loans. If you are struggling with credit scores, you may still get a payday cash lender but the terms can be less attractive. As a consequence, you may be dealing with higher loan payments every month.
These loans are beneficial if you want to do a minor home improvement that doesn’t require lots of money. Since there is no collateral required, a lender is willing to work with someone with a low-risk profile. This means it is easy to get a loan if your credit scores are about 600 and your income is impressive. When getting these loans, it is important to shop around and look for a lender who offers you the best rates.
Applying for a renovation loan
It is prudent to make the application a few months before your planned date for the renovations. Normally, the borrowing process can be lengthy and starting early helps you to stick to your schedule.
You have to be realistic about the amount needed for the renovation but at the same time include some wiggle room. In a nutshell, your budget and loan to value ratio should guide you when making the decision. You should restrain yourself from taking an amount you can’t afford to repay just because you want to make high-end improvements. The amount of time you will be paying the loan is important and your budget determines it. However, you shouldn’t take a long-term loan to make small renovations.
Getting prequalified for a loan is important since it helps you get a clear picture of the exact rates and terms you will be given. While you can request for prequalification from multiple lenders, it is important to make sure they conduct soft credit checks. While this is a great strategy to select the most appropriate loan, a lender who does hard inquiry can lower your credit scores.
As such, you have to make sure if you are eligible for a guaranteed loan. Besides having a stellar credit score, you might need to have a good debt to income ration to qualify for some loans. Nevertheless, some lenders don’t pay much attention to credit score but they will consider your entire credit profile.
A home improvement project can be stressful to deal with especially when you have to plan meticulously for things like financing. But when you are aware of the available financing options, it is easy to look at the advantages and disadvantages of each method and decide which works best for you. Of course, this depends on your financial situation, but you should shop for the various providers to make sure you are getting the most favorable deal. Most importantly, you have to make sure that you are taking a loan that you can afford to pay without making your financial situation worse.