Home improvements can add value to your home; the right home improvement loan can provide the financing you need to pay your contractor and keep your project on track. While home improvement projects can present challenges,finding a home improvement loan doesn't have to. In general, there are two types of home equity financing that can fund your home improvement projects. You can take out a home equity loan, also called a second mortgage, or you can apply for a home equity line of credit. The scope of your project and how and when you'll pay for home improvements can help you decide which option works best.
Using a Home Equity Loan
A home equity loan is a mortgage that's structured as a one-time loan for a specific amount. Home equity loans typically carry fixed rates, but may also be available with adjustable interest rates. You'll make fixed monthly payments until the repayment term ends (or sooner if you choose). As with your primary mortgage, home equity loans accrue interest on the entire amount borrowed; interest is calculated on the remaining loan balance after each payment is made. A home equity loan can work as a home improvement loan, but remember to include closing costs as part of your home improvement expenses if calculating a return on investment (ROI).
Home Equity Line of Credit: Borrow as Needed for Home Improvements
A home equity line of credit or HELOC is a line of credit that you can use for paying home improvement costs as they occur. This option provides flexibility if you're doing extensive improvements over a long period or will pay multiple contractors and vendors. A HELOC works like a credit card or debit card, you can draw against it up to your available credit line and are charged interest only on amounts withdrawn. Interest rates for home equity lines are typically variable and your HELOC will have a repayment period as specified in your loan documents. You'll be required to repay the HELOC plus accrued interest within the repayment period. A HELOC typically has fewer fees and costs than a home equity loan, but it's important to understand exactly when and how much your interest rate on a HELOC can increase.
Costs for home improvement loans can vary according to individual circumstances; it's a good idea to request and compare multiple quotes to find financing best matched to your project and budget.
Shop and Compare Home Improvement Loan Options
Your cost for a home improvement loan can vary according to individual circumstances such as your credit history and the amount you borrow. It's a good idea to request and compare multiple quotes to find financing best matched to your project and budget.
Depending on the nature of your home improvement project, you may be in a hurry to secure financing, but it's best to take a little time and shop for the best rates and terms for your home improvement loan. Although home improvement retailers and contractors may offer financing for home improvements, it's important to compare interest rates and finance charges. In general, home equity loans are likely to offer lower rates as they are secured by your home. Unsecured loans are a higher risk to lenders, and consequently, they carry higher interest rates and fees.
Beware of scam artists who may offer to "help" you by offering unsolicited home improvement loans or referring you to a specific lender.The FTC encourages homeowners to be careful and to check documents before signing anything. Don't give in to pressure or suggestions to "ignore the small print" on home equity loan documents and related paperwork.
Exploring your options for financing home improvements helps with planning your project and may save time and money later.