Home improvement financing is a loan that you can use for renovations or remodeling your home. Customers apply for efficient and profitable home improvement financing as authorized by the National Association of the Remodeling Industry (NARI) either to give a facelift to their existing home or to increase its value or, in some cases, both.
Why does one need home Improvement Financing?
Primarily, as a customer, it is imperative to scrutinize whether your home improvement goals make financial sense or not. A complete redo of your house may sound great in the beginning, but do you see any benefit to your house, income and consider if it is worth it to take on the large project. Making landscaping enhancement, adding fresh exterior paint, modifying the holistic appeal of the house is a good investment as it wows potential buyers and boosts the value of the property.
One must make a wise decision before pouring in investment into your current house. Besides the investment, a customer must investigate various factors like availability of capital, current income, credit score, the term of the loan, financing options, rates of interest, and the best deals of home improvement financing available in the market.
Alternatives to home improvement financing:
If you don’t wish to take a loan for the renovation, you can consider other options like:
- Current Savings
If you have an ample amount of savings and you can afford to utilize them for renovations, it would be better than financing as you won’t have to pay any interest on that.
- Credit card
Some credit cards offer a 0% interest rate on home improvements which means no added interest will be charged for a certain period. But if the period lapses, the interest rate could be high.
- Re-mortgage your house
By re-mortgaging, we mean switching to a new mortgage provider with a better deal. The extra money from it can help you with home improvements.
Different kinds of loans while financing a home improvement project?
The financing that’s most suitable for renovating your house depends on a lot of personal factors like the amount required, the term of the loan, credit score, etc. Below listed are a few loan options one can opt for to finance his home improvement:
1. FHA 203(k) loans
These help in building the cost of repairs into a mortgage and requires lesser down payment with relatively low-interest rates
2. Home equity line of credit (HELOC)
This loan is vulnerable to rising interest rates, and one can withdraw money gradually as needed. Its better interest rates than credit cards or personal loans, but there is a risk attached to overspending. This is curated primarily for homeowners who have ongoing renovation costs over many years.
3. Home equity loans
These have quicker close times than cash-out refinance with closing costs which are usually 2- 5% of the loan. This loan is feasible for anyone who has a fixed budget for home renovation and wants to keep a low rate on their existing mortgage.
4. Personal loans
These are unsecured loans, and home is not used as collateral. This requires a good to the excellent credit rating of the customer and is usually a quicker turnaround. It comes with typically higher interest rates and shorter loan periods
5. Credit cards
These are only feasible if you can pay back in a short period, as interest rates are substantially higher, but it helps to offset some of the costs.
6. Cash-out refinance
This is a great option that provides the option to take out larger loans but is risky for people who have a lot left on their mortgage. It typically offers lower interest rates and has longer closing times. This option has an added perk of funds availability for renovation and is like a traditional mortgage refinance.
7. Asking your contractor for a loan
Some contractors of third-party lenders may offer short-term loans for financing home improvement projects.
Five Things to Keep in Mind for Efficient and Profitable Home Improvement Financing
One should be highly cautious and vigilant while opting for the best home improvement financing option and should consider various factors before applying for one.
Here are the top five things that you need to know before applying for a home renovation loan:
1. The Loan Amount and Different Loan Rates:
Before initiating the renovation, a customer must have a strong alliance with a contractor or a professional who can help him calculate a rough estimate of how much amount he would need. This amount should also add 20% of the recommended cushion amount. A list of things required, jobs to be done, and the available resources should be documented.
After working out on all resources, the customer must come up with an approximate amount he would need from financing.
Next, he would need to shop around for the best rate of interest available. You can compare the ROI of banks, NBFC, private lenders and eventually settle for the lowest one. The repayment period and miscellaneous charges should be considered too.
2. Eligibility Criteria and Documents
Once the loan amount is decided, you need to work on the eligibility criteria that different home improvement financing options could demand. This depends on factors like age, income, residence, credit rating, residence, etc. It depends on the financer who decides why to offer home improvement consumer financing to a specific customer and if he is eligible for it.
It is highly recommended to use an online loan eligibility calculator to understand the amount one may be eligible for. Once the loan amount is ascertained, you must keep all your relevant documents handy like address proof, ID and Age proof, sources of Income, Tax Returns, etc.
3. Type (Secured/Unsecured) Repayment Tenure and EMI of the Loan
Before opting for the best home improvement financing option, always consider whether you should go for a secured loan (with collateral) or an unsecured loan (without collateral). Both have their pros and cons, so the choice could be personalized.
Besides selecting the right type of loan, one must consider the repayment schedule and monthly EMI of the loan. It should not be over the top and should fit in well within your monthly budget.
4. What is the Interest Rate, and whether it is Fixed or Floating?
Interest rates again depend on a variety of factors, like the credit score, LTV (loan to value) ratio, inflation, federal reserve rates, and type of loan. The interest rate may fluctuate depending on the Government rules and policies, so whether you want to opt for fixed or floating interest rates is entirely at the discretion of the customer.
The rate of interest remains constant in a fixed type, whereas in floating, it keeps adjusting and changing as per market trends.
5. What are the APR and Hidden Fees in financing options?
APR or the Annual Percentage Rate represents the actual annual cost of funds over the loan term. APR includes rates of interest, closing costs, origination, and other fees. This is not the rate of interest, but this could be the total expense of applying for a loan. It could also include hidden fees, which may increase the loan’s APR and total expenses.
Renovating your home will be a rewarding experience for you if you keep all these pointers in mind. Each home demands maintenance work such as restoration, painting, remodeling, and more for proper upkeep. Thus, it’s essential to refurbish your house at periodic intervals to ensure the safety of your family, as well as the resale value of your property.