If you’re planning on becoming a homeowner, be prepared to spend a ton of money. As of July 2017, the average new home in the U.S. costs $371,200, reported the Census Bureau. If you can’t afford the price of a new house, you might have to turn to a fixer-upper to stay within your budget.
However, buying a cheaper home that needs repairs can be costly, too. If you want more complex changes, such as changing the cabinets in the kitchen or installing a new bathroom, your renovations can cost thousands. While paying cash is ideal, that idea is unrealistic for most young people just starting out.
Home improvement loans can help make your remodeling dreams come true. But before you sign your name on a loan application, make sure you understand what you’re getting into.
What are home improvement loans?
It’s important that your house is comfortable and works for your family needs. If it doesn’t, it can lead to a lot of stress. For example, if you have several children but only one bathroom, getting the whole family showered and ready for school and work can seem downright impossible.
If you want to put in a new bathroom, install solar panels, or just need new furniture, a home renovation loan can be exactly what you need to complete your projects.
There are three main types of home improvement loans:
1. Home equity loan
A home equity loan is when you borrow money using your house’s equity as collateral. Your home equity is the difference between your home’s value and what you’ve paid toward the mortgage.
For example, if you just purchased a $200,000 home and made a $20,000 down payment on the loan, your home’s equity is just $20,000 and you owe $180,000 on the home.
However, your home’s equity can increase as you make mortgage payments and if the house’s value increases. If your home’s appraised value grew to $220,000 and you paid $10,000 toward your mortgage, you would have much more equity.
With a home equity loan, you can borrow a percentage of the equity in your home. Depending on the lender, you could borrow as much as 85 percent. If your equity was $50,000, that means you could borrow up to $42,500.
Because you are using your home as collateral, interest rates for equity loans tend to be lower than other loan types. However, that can also be a problem. If you can’t keep up with your payments and default on your loan, your lender might foreclose on you and you could lose your home.
In addition, if home values decline and you owe more on your home than it’s worth, a home equity loan isn’t an option.
You can apply for a home equity loan with most banks or credit unions. The length of repayment can vary from lender to lender but typically is between five and 20 years.
2. Title I Property Improvement loan
If your home doesn’t need extensive repairs, a Title I Property Improvement loan can be a great option.
With this type of home renovation loan, the Federal Housing Administration (FHA) insures loans made by lenders to borrowers like you. If you default on your loan, the FHA’s insurance covers up to 90 percent of the loan, so there’s less risk for lenders.
You can borrow up to $25,000 if you’re using it for a single-family home, or $12,000 if you’re using it for an apartment or townhouse. Depending on the type of home you have, your repayment term could be 12 to 20 years.
The FHA does not determine interest rates. Instead, the loan’s rate can vary based on the lender and your location.
The FHA also charges an annual premium of $1 for every $100 you borrow. You pay for the insurance through a separate monthly bill, or it can be charged as a higher interest rate on your loan.
If you take out a loan for more than $7,500, you’ll need to secure the loan with your mortgage or deed of trust on the property.
Only financial institutions approved by the U.S. Department of Housing and Urban Development (HUD) can offer Title I Property Improvement loans. You can use HUD’s locator tool to find a lender near you.
3. Unsecured home improvement loan
If using your home as collateral scares you, there’s another way to get the money you need. Some banks offer unsecured home improvement loans to help you pay for repairs. Even better, they don’t require you to offer up your home or other assets as a guarantee. If you default on your debt, the lender can’t take your house from you.
Depending on the lender, you could borrow up to $100,000 and get the funds quickly. However, there are some drawbacks with going this route.
For one, the repayment term is usually much shorter than the terms for home equity loans or the Title I Property Improvement loan. Unsecured home improvement loans can have repayment periods as short as two years.
In addition, you’ll likely pay more in interest. As of August 2017, a home improvement loan from SunTrust Bank can have interest rates as high as 12.54%. If you instead use a peer-to-peer lending service like LendingClub, you could pay over 35% in interest.
While an unsecured loan can give your home more protection, you will pay a premium for that security. With higher rates, you could pay thousands more over the length of your loan.
For example, if you took out a $20,000 home equity loan at 3.99% interest with a five-year term, you’d pay back just $22,094 in total. However, if you took out an unsecured loan at 35% interest over five years, you’d pay back a staggering $42,588.
Also, unsecured home improvement loans are typically not eligible for interest deductions when tax season arrives; both home equity loans and Title I Property Improvement loans usually qualify.
If you can only get a loan with a high interest rate, it might be worth waiting until you have more equity in your home before borrowing.
Finance home improvement jobs carefully
Before applying for home improvement loans, make sure you have a plan and budget in place to repay what you borrow.
Those new granite countertops or stainless steel appliances will seem far less attractive when you’re strapped for cash and can’t afford your payments. Knowing what you can truly afford can help you enjoy the renovations guilt-free.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|7.39% - 29.99%||$1,000 - $50,000|
|4.98% - 14.24%1||$5,000 - $100,000|
|8.00% - 25.00%||$5,000 - $35,000|
|4.99% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|5.99% - 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.25% - 14.24%||$2,000 - $50,000||Visit Earnest|
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