Home improvements are all about making your property more comfortable, more beautiful, and, if you’re planning to sell it in the future, more valuable. While the safest option will always be to save and pay for upgrades in cash, this might not be realistic for you. Fortunately, there are a number of ways to borrow money for your home improvement project. We look at a few of these loans below.
1. Personal Loans
Personal loans are ideal for smaller projects that don’t require a lot of cash. These include minor cosmetic improvements, whether it’s new sprinklers or new tile, or small repairs like chipped paint or a broken fence.
As a rule of thumb, you want to keep your loan size small to keep your closing costs low. Personal loans typically come with higher interest rates than home loans, so the faster you can make payments, the better. Although terms for personal loans can last as long as 10 years, that should never be an option if you want to avoid paying an absurd amount of interest.
2. Home Equity Loans
Home equity loans leverage your home as a collateral, allowing you to qualify for a sizeable loan at a lower interest rate than you would get with a personal loan. Of course, the risk is that if you default on your loan, your home will be foreclosed.
In any case, if you have substantial equity on your home, a secured home equity loan can be a great way to acquire funding for larger home improvement projects, such as a kitchen remodel, a basement upgrade, or new appliances.
3. Refinancing
Refinancing means taking on a new loan to replace your existing mortgage, which also comes with the add benefit of being able to borrow a little more to pay for your home improvement project.
For this strategy to work, however, you need to know how much equity you have on your property, which means getting familiar with your loan-to-value ratio. It’s also important to prepare for the biggest drawback of cash-out refinancing, expensive closing fees.
Lastly, a refinance means that you will be extending the life of your home loan, so your new monthly payments will now go towards paying off interest instead of the actual loan balance. But this can easily be mitigated by paying extra each month.
4. Government-Backed Loans
Government-insured loans are great for borrowers with limited equity or credit issues. For example, FHA Title 1 loans allow you to borrow up to $7,500 unsecured. Larger amounts, however, will require using your home as collateral.
The rule for using these loans for home improvements and repairs states that it can applied on anything to making it “basically more livable and useful.” This can include:
- Buying new appliances
- Home improvements to enhance accessibility for people with disabilities
- Energy efficiency upgrades such as solar power systems
If you want to learn more about loans for home improvement projects and repairs, get in touch with Chris Lamm to talk about your options.