Hey there! Just joining us? We’re in the middle of a series explaining the ins and outs of home improvement loans. Click here to read the first post that talks about what a home improvement loan is, and then click here to check out the second post in the series that talks about where you can get the financing for a home improvement loan. If you’ve been following the series, check out this week’s post explaining the types of home improvement loans that are available. 🙂
What kind of home improvement project are you considering? Refinish the basement? Buy shiny new kitchen appliances? Install better insulation? Replace your roof? Add a family room? There are so many possibilities — and they cost so many dollars.
If you’re serious about home improvement but seriously can’t pay cash, one of the many home improvement loans might help you fulfill your dreams without breaking the bank — not even your piggy bank. The only downside is there are so many to choose from, it can quickly get overwhelming.
Don’t panic, though. We’ll break it down so it’s a little easier to manage.
If want a great interest rate for your loan — who wouldn’t? — look into a home equity loan, or HEL. These are pretty straightforward. You get a fixed term for the loan, and the interest rate won’t change. This loan type is also sometimes called a second mortgage. These loans are for big bucks, and you get the money all at once. Handy, because they’re typically used for major renovations.
You will need to build up some equity in your home before you can get this type of loan. Depending on the size of your first mortgage, credit rating and income-to-debt ratio, you might be able to borrow up to 80 percent of your house’s appraised value. Heck, certain lenders give some homeowners 100 percent. The drawback? A higher interest rate.
Because this loan is a type of mortgage, you get to claim the interest on your federal taxes. Nice. What’s not so nice, however, is you’ve essentially used your house as collateral. If you default on repayment, you can lose your home. Ouch.
You can also use your house’s value in another way: a home equity line of credit, or HELOC. For this, you get a set amount, but you use it only when you need it. You can dip into the fund for five to 10 years, and you pay interest on whatever you remove. Then you’re cut off, and you have about 15 years to repay the loan.
HELOC is most useful when you have several upcoming projects or one job that spreads out over months and months — and months and months and months. The interest rate for HELOC is typically tied to the prime rate, which varies. You can wind up with a rate that’s a lot higher than where it started. So you gotta ask yourself: Are you feeling lucky?
A personal — or unsecured — loan may be the way to go for a mid-size home improvement project. You’re not depending upon your home’s equity to secure the loan, so you won’t get as much money. The bright side? You don’t put your house on the line, so the lender can’t foreclose — and that’s always a good thing. There are also no closing costs or fees. Nothing’s perfect, though. Interest rates are higher, and the term is shorter than with a HEL.
If you’ve got your eye on — what shall we call it — a fixer-upper, there’s a loan that bundles the mortgage and renovation costs and wraps it all with a tidy bow (Ok, the bow is optional). The Federal Housing Administration — FHA — offers 203(k) loans, which cover house price, materials and labor. You can even include a contingency fund or mortgage payments if the house isn’t habitable for up to six months. What a deal.
A 203(k) loan requires a relatively low down payment. Funds can be used for either structural or nonstructural repairs. And if the home you’re living in now is unsound, you’re in luck. Well, maybe luck’s not the right word, but these loans are also available for homeowners who want to refinance.
Cash out refinancing is similar to a 203(k) loan because you combine mortgage and home improvement costs. Got a big project to do? Got a hefty interest rate? If current rates are a lot lower, this may be the loan for you. You could end up with lower monthly mortgage payments that include the renovations. Sweet!
Naturally, there’s sour, too, though. Closings costs are often pretty high, and the interest rate tends to be higher than a basic refinance. Plus, you turn back the mortgage clock and start all over from the beginning. You probably don’t want to go this route if the end is in sight. Are you ready to begin again and pay for another 30 years?
Got a small project to do but not enough ready cash? A credit card is a simple way to get quick money — but don’t get stuck with high interest rates. Take advantage of one of the zero percent interest offers that comes your way. Just be sure to pay it off during the grace period, which generally lasts 12 to 18 months. If you don’t, you’ll be sorry. Those interest rates will kick in with a vengeance.
Head spinning yet? Told you there are lots of choices. Mull them over, do some math, cross your fingers and choose the one you think is best for your circumstances. The next post in the series, “How to Plan for Your Home Improvement Loan Project,” is the last step before you start contacting lenders. Then you’re on your own. May the force — or the loan — be with you. Ready for Part 4? Click here!