This is the second part of my series on home improvement loans. If you’re just tuning in, make sure to check out last week’s post on what a home improvement loan is before you start reading this week’s post! This week, I’m covering where you can find home improvement loans that best fit your needs. Enjoy! 🙂
Where will you go? Oh, the bank? That’s OK, but… No, no, nothing’s wrong with the bank, but did you know that you have other options? Banks are not the only institutions that offer home improvement loans. Why don’t you check them all out? It wouldn’t hurt. You might wind up right back at the bank, but you may find an alternative that suits your needs better. You’ll never know ‘til you try. What’s it gonna hurt?
Banks or credit unions are direct lenders. You apply to them, they assess you and then they give you money… you hope. See how direct that is? You hope. Quick recap for the uninitiated: Credit unions are not-for-profit companies that serve their members. Typically, members are drawn from specific employers, geographic locations or groups, such as educational, religious or professional organizations.
Many prospective borrowers approach the credit unions or banks they already use and trust. Because the loan goes straight from them to you — you hope — the process is fairly fast. You’re also not paying extra for an agent or intermediary. Your options, though, are limited to what that particular lender has to offer. You may have to visit more than one to get a really good deal on a home improvement loan. Be aware: Once the loan is made, the lender may sell your loan to another institution. Don’t take it personally. They’re fickle that way.
If you think variety is the spice of life, consider using a mortgage broker. This may be the way to go if you’re thinking about taking on a second mortgage or refinancing to make your home improvement dreams come true. Mortgage brokers are go-betweens. They work with many lenders, so they can offer you options. After a lender approves your loan, the broker sees you safely to the border of Munchkin land and waves goodbye. The rest is up to you and the lender.
Since mortgage brokers deal with multiple lenders, you save time: No traipsing from one office building — or website — to another. The broker might have rates you can’t easily find. Then again, mortgage brokers have to make a living, and someone pays for that. Just be sure you’re fully aware of these cost of the home improvement loan before signing anything. Put out your glasses and read the fine print.
If you have a retirement fund, you might be able to borrow from yourself. Many 401(k) programs let members borrow some of their contributions. Since you don’t need approval for the loan, you get your money quite quickly. You usually have five years to fully repay. Interest rates tend to be lower than conventional loans and, anyway, you’re paying them to yourself. How cool is that?
But…wait for it…there’s a downside, too. Downsides, actually. If you don’t repay your loan within the allotted time, the IRS magically turns the loan into an early withdrawal. That means taxes and penalties. There’s more: If you quit your job, get fired or are laid off, the loan is suddenly due. If you don’t repay it pronto, IRS magic strikes again with taxes and penalties. Finally, even though you’re paying yourself back with interest, the loan takes a permanent bite out of your retirement fund.
It’s not unusual for consumers to get flooded with credit card offers. Sometimes your current cards want to give you special deals. Or a new credit card company wants to be your friend. In the reams and reams of paper, you might see this: 0 percent interest for 12 to 18 months. If you have the funds and discipline to pay off the bill before interest kicks in, you’ve essentially paid for the job with an interest-free loan.
It’s very likely that you’ll be approved quickly for a card, so you can start the work soon. Just make sure you read the contract thoroughly and understand what happens if you miss the deadline. You might face some sky-high interest rates. Don’t be caught by surprise. To be sure you’re covered, consider arranging a monthly automatic payment. That new shower won’t be so enjoyable if you know you’re paying 20 percent interest on it.
Some contractors offer to finance projects themselves. This often doesn’t go well for lenders, so it’s not a recommended option. After all, you choose a contractor because of their construction competence, not their financial abilities. You might end up with a bunch of hidden fees and extra charges on your home improvement loan. If a contractor wants to talk about monthly payments and not the total cost of the project, run away. This probably means you’ll be overpaying big time.
So now you know the possibilities. It’s a lot to digest, so weigh the pros and cons of each. Once you decide on a lender for your home improvement loan, though, you’re not done. You’ve got more choices to make! Come back to read the next post in this series, “What Types of Home Improvement Loans Are Available?” That’s right. Not only are there a variety of lenders, but they also offer a range of products. And you thought you were done…Click here to read Part 3!