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Home improvement loansWhen you are considering adding amenities like a new bedroom, bathroom, finishing the basement, putting in a pool, adding a garage, or even replacing the roof on to your home, you are considering a high dollar investment in your home. Most people will want to finance this investment so that they can spread the payments over time. Other than the obvious benefit of being able to pay for the improvements in monthly instalments, there is also the benefit of having a tax deduction on your home improvement loan interest.There are several different types of home improvement loans. Generally, home improvement loans are in a secondary position behind your primary first mortgage. There are several different types of secondary mortgages that can be used as a home improvement loan. We will discuss them here. Home improvement loan type 1 - Home Equity Line of CreditWhen you have equity in your home, and the size of the home improvement project is not large, then a home equity line of credit may be the right choice for you. Like the term says, this loan is based on the equity in your home, which is defined as the difference between your existing financing and the value of the home. Home equity lines of credit is designed to be used, paid off, used again, paid off again, used again, etc.... You typically get a credit card and a check book to go with it.It works like a revolving line of credit, and it shows up on your credit report as a revolving line of credit. You use it just like a credit card. The loan terms are typically based off the prime rate plus a margin, which is the lenders' profit. Because the prime rate is currently at 7.75%, you can expect to have a heloc (home equity line of credit) rate of anywhere from 8.5% to 14.5%. The actual rate of this type of home improvement loan will depend on your credit, as well as the total loan to value. (The percentage of all the loans on your property off the appraised value of the home). Expect higher margins (and therefore a higher interest rate), if your credit is not good, and expect the same if your loan to value is high. In other words, your home improvement loan rate will increase the closer you get to the value of your home. The biggest benefit of a heloc is that you have access to the money over and over again as you pay it off. In other words, you don't have to refinance to get at the equity in your home, you simply write a check against your line of credit to get to the funds. The biggest down side to a heloc is that the rate varies based on what happens to the prime rate. Home improvement loan type 2 - A fixed mortgageIf your home improvement loan is going to be large, you may want to consider a fixed second mortgage instead of a heloc. Why? Because your rate is fixed, and it is typically lower than what you will get on a heloc (home equity line of credit). With a large loan amount you don't want to be exposed to interest rate risk, and you want to keep your payments lower.This home improvement loan is also in second position behind your first mortgage, and it is typically a 30 year fixed loan with a 15 year balloon. You can also get it in a 10 year product, or a 15 year product. Going with the 30 year product for your home improvement loan is typically a better idea, since you can always make extra payments on it, but if you have a short term loan with high payments and you experience financial difficulty, then it can be tough to make that mandatory high payment. Home improvement loan requirementsBefore applying for your home improvement loan, you should have a detailed plan of what you are going to do with the money. Not only is it good for you to understand the total cost of the project, but the cost breakdown of the contractor quote may be required as part of the loan documentation. Always get multiple quotes from different contractors in order to save yourself money. Depending on the scope of the project and your skill level, you may decide to do the work yourself.Home improvement loans typically require good credit, especially with helocs (home equity line of credit). Remember that most lenders will not do a home improvement loan behind a negative amortization first mortgage (eg. Option ARM). The most important item that will determine how much you can borrow on your home improvement loan is the current market value of your home. You can get your real estate agent to do a comparable market analysis for you, you can pay for an appraisal (not recommended because your lender may require an appraisal anyway, and they may not accept your appraisal. You will end up paying twice for an appraisal), or you can use Electronic Appraiser - Instant Results! |
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