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What is a Home Improvement Loan? – Series 1/4

July 1, 2016 , In: Advice, Repairs , With: No Comments

As I’ve begun searching for my own humble abode, I’ve come across a topic that few realtors or home buyers are very well versed on – a home improvement loan. I’ve already grown to love upcycling, so it only seemed natural that I would choose a home that needed a little extra TLC when the time came to lay my money down for a home. While my realtor is currently evaluating my sanity, I’m excited by the prospect of a new challenge, but I wanted to do some research on home improvement specific loans before I got started. Below is what I found when researching, I hope you’ll stay with me during this 4-part series!

Go ahead. Be honest. No one’s listening. What would you like to change about your house? Forget just painting a room. Think big. Is your kitchen outdated? Bathroom too small? Furnace on its last legs? Roof starting to look like Swiss cheese? Maybe you’ve been feeling a bit crowded lately and think an addition would bring welcomed relief — or escape. The trouble is that those home improvements can be hundreds, if not thousands of dollars. Not exactly what I’d call chump change. That’s where a home improvement loan comes in handy.

What is a Home Improvement Loan?

If you seriously start considering a major home improvement, you may be in the market for a home improvement loan. If so, you’re in good company. During 2015, homeowners spent $142 billion on home improvement projects. Seventy-nine percent spent more than $1,000 on significant home improvement projects. About 17 percent used some form of financing to get the job done last year.

Home improvement loans come in a variety of formats from an assortment of lenders. We’ll get to those in other posts soon. That’s a promise.

For now, here’s an overview of the topic so you’ll know what you’re facing. Armed with this information, you can decide if you want to explore more of the home improvement frontier. Or maybe you’ll conclude that your ‘60s-era kitchen with its groovy linoleum tile and wood paneling is just fine.

Who’d Be Crazy Enough to Do This?

A home improvement loan is money that you borrow from the bank based on the equity you have in your house, i.e. the value of your home minus how much you owe on your mortgage.

Folks who take out home improvement loans generally want large renovation projects or costly repair work. Smaller jobs are often paid for in cash. Many homeowners would choose moving over remodeling any day. However, some opt to make changes because, in 2016, the number of houses on the market is lower than the demand.

So growing families add more space. Older adults adjust their environments to better handle the aging process. In general, a homeowner undertakes renovations to make a house easier to live in, increase its value or both.

Home Improvement Paint

And the Point of This Is?

Why take out a home improvement loan? The answer is pretty simple. Renovating or repairing your house can be expensive. While people might pay cash for smaller jobs, they don’t have the immediate funds for substantial alterations.

Credit cards are often not good options for big jobs because their interest rates are usually higher than those for home improvement loans. Much higher. Way, way higher. And the better your credit score, the better rates lenders will offer you. You may have a winning smile, but an excellent history of bill paying goes a lot farther.

The Sky’s the Limit! (Not Really)

For best results, determine how much you’ll need before applying for a home improvement loan. The amount is job-specific. When homeowners plan to hire contractors, loans cover labor and materials. Often a 10 percent cushion is built in to handle unexpected — and usually unpleasant — surprises.

For do-it-yourself jobs, homeowners have to research materials, permit fees and equipment rentals before settling on a number. Since DIY-ers generally have less experience in these matters, the cushion is proportionally larger, 20 to 30 percent extra.

That’s how much you ask for. How much you get is another matter. Lenders aren’t your friends, so they won’t throw money at you just to help out. Those are the best friends. The amount you can borrow depends on your income, credit history and value of your home.

It’s All About You

The smiling faces lenders show hide one essential fact: they want their money back — the nerve. You’ll get a loan if you can show you’re a good risk through these factors:

  • Income: A large income doesn’t guarantee you a loan. What matters is what you do with that income. If you already carry a lot of debt, lenders are going to start looking at you funny. Generally, borrowers whose total debt is no more than 36 percent of their gross annual income keep lenders from getting antsy. And lenders really start to relax when all housing costs don’t go above 28 percent.
  • Credit rating: If you truly feel the need, you can check with a credit-reporting agency to learn your exact score before you apply for a loan. But you should have a good idea of what your rating is already, as long as you’ve been paying attention. Lenders are primarily concerned with two variables. Have you maxed out any credit cards? Do you pay your bills on time? Hopefully, those answers are “no” and “yes,” respectively. More responsible homeowners get offered more money at lower interest rates.  

Loan-to-value ratio: Say what? This isn’t as complicated or mathematical as it sounds. Take a deep breath. Relax. You can follow this. LTV begins with the appraised value of a house. Then determine 80 percent of that. Subtract your mortgage balance. That’s how generous lenders might be. Want an example? Let’s say:

  • Your home’s appraised value is $100,000.
  • Eighty percent of that is $80,000.
  • Your mortgage balance is $50,000.
  • Depending upon the other factors, you might be able to borrow up to $30,000.

For homeowners with gold star credit ratings, lenders might nudge that 80 percent higher. The opposite is true for a less-than-stellar history. Lenders might start with only 65 or 70 percent of a home’s value. Want 100 percent? You can always ask … but be prepared to pay higher interest rates.

That’s the basic lowdown on home improvement loans. Still interested, or have you been scared off? If you’re game, the next post looks at what types of lenders offer home improvement loans. Gotta know where to send the paperwork!

P.S. – Have experience with a home improvement loan? I’d love to hear your story in the comments!

Ready for Part 2? Click here!

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Editor at Your Wild Home
Hey! I'm Megan. I am a dog-lover and enjoy exploring the outdoors. Your Wild Home covers a lot of topics, including (but not limited to) home improvement, home decor, construction, real estate, and sustainability. I enjoy writing in third-person and I am addicted to chocolate, coffee, and terrible puns. Learn more on my About Me page!
What is a Home Improvement Loan? - Series 1/4
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What is a Home Improvement Loan? - Series 1/4
I've come across a topic that few realtors or home buyers are very well versed on - a home improvement loan. Here's my breakdown of what you need to know!
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Your Wild Home
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