After you’ve lived in your home for a while, it starts to lose its charm. You look around and wonder what you can do to make it more comfortable or more stylish. Maybe you want to add an extra room or build a deck.
Once you start shopping around, though, things get frustrating. A minor kitchen remodel can cost more than $20,000, according to an annual report by Hanley Wood, a data company focused on the construction industry. Nevermind adding another room, which can cost almost $90,000.
If you’re going to afford such changes to your home, you’ll probably need a home improvement loan. And that means shopping around for the best home improvement loan rates possible.
Why you want the best home improvement loan rate
As you know, whenever you borrow money, you pay interest for the privilege. The bigger your loan balance, the higher the price you pay. Because a home improvement loan can be tens of thousands of dollars, you can expect to pay quite a lot in interest.
Using a mortgage calculator, see what happens if you borrow $15,000 for five years at 6.25% instead of 4.50%.
You can save $725 over the course of the loan with the lower interest rate. So, now that you know there are savings at stake, how do you make sure you get the best home improvement loan rate? Here are three tips for getting the best rate.
1. Start with the equity in your home
Most people take out home equity loans or home equity lines of credit (HELOCs) to make home improvements. As Kylee Della Volpe, editor of Mortgages.com, puts it: “You’re using your home as collateral instead of relying totally on your credit score.”
Your equity is based on how much “ownership” you have in your home. To figure out how much equity you have, you take the market value of your home and subtract what you still owe on the mortgage. If your home is worth $250,000 and you owe $170,000, you have $80,000 worth of equity.
However, it’s important to understand that many lenders won’t let you borrow against the full amount of equity you have. Instead, they are likely to limit the amount you borrow. Many home equity loans and HELOCs have flexible loan terms (agreed on with lenders), so lenders are reluctant to let you borrow more than they think you can handle. Even so, the more equity you have in your home, the better the rate is likely to be, Volpe says.
2. Improve your credit score
While your home equity can make your credit score less important to your home improvement loan rate, pointed out Volpe, the reality is that it still matters.
As Tom Drake, a financial analyst and the founder of the financial website Maple Money, says, “The best thing you can do if you want good rates on any type of home improvement loan is to take steps to improve your credit score,” he says.
Two of the main strategies for keeping your credit score in tip-top shape are:
- Make your loan and bill payments on time. “Missed payments can drag on your score, so be consistent in paying your other debts on time and in full,” says Drake. “This is the most important aspect of our credit score.”
- Reduce your debt. “The more debt you have relative to the size of your credit lines, the lower your score,” Drake explains. “The next best thing you can do is pay down some of your credit card debt.”
Drake also recommends being careful how much credit you apply for in the months leading up to your home improvement loan application.
“With a good credit score and a decent amount of equity in your home, you should be eligible for the best available rates on home equity loans and HELOCs,” says Drake.
3. Shop around for the best home improvement loan rates
Once you know you qualify for the best rates, it’s time to do a little looking around. “You don’t have to use the same lender for a home equity loan as you did for your original mortgage,” Volpe says. “That gives you the flexibility to shop around for the best rate.”
Volpe suggests starting with credit unions, then moving to community and regional banks. The internet also provides tools for finding the best home improvement loan rates. You can use the internet to compare loan rates and find terms that fit your needs.
You don’t have to limit yourself to home equity loans for home improvement. Drake says that it’s possible to get money for home improvements with the help of personal loans, and even by using peer-to-peer lending sites such as Lending Club. “With a personal loan, you can use the funds for anything, including home improvement,” he notes.
Having your loan tied to a part of your home’s value usually results in lower interest rates, Drake says, but someone with a good income and a high credit score may be able to get a low rate on a personal loan or peer-to-peer loan.
“Check into the possibilities,” he suggested. “You might be surprised at some of the interest rate quotes you get.”
Be careful when getting a home improvement loan
However, getting a home improvement loan based on equity comes with risks. “You can lose your home if you don’t make your payments, so be careful,” Volpe says.
Before deciding to spruce up your home with the help of a loan, weigh your options and review your financial situation. Make sure you can afford the loan, figure out if you really do need that deck addition, and then try to get the best possible interest rate.