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How Home Improvement Loans Work And When You Should Consider Them

It is normal not to know how home improvement loans work because people only want to use these when funds are needed to fix the home. Home improvement loans (also known as renovation loans) can be offered as mortgages or even personal loans. Based on loan type received, proof may be needed in order to show that money was actually spent on home improvements or paid to contractors.

How Home Improvement Loans Work

Home improvement loans are often used when buying homes that require some repairs. Multiple loan opportunities are available, with the way in which they work being highly dependent on financing option considered. The popular home improvement loan options are the following:

  • Fannie Mae HomeStyle – This is a single-close loan. It includes home repairs cost in overall amount. You can use it for the repairs that appraisers require or for changes you want to make. The loan is highly appealing for the borrower since you can opt for 30 or 15 years mortgage terms and adjustable rates. The final loan amount is going to be based on projected home value after repairs are done. If the credit score is good, this loan option gives you highly competitive interests.
  • EZ “C”onventional – This home improvement loan can be used with the conventional mortgage for home repairs that are non-structural and that do add property value. The loan covers borrower-selected and appraiser-required renovations.
  • Jumbo Renovation – This is similar to the EZ “C”onventional improvement loan but will be applied only for higher-priced homes that are not covered by the other possible home repair loans. Just as the name implies, the loan is meant to cover loans for jumbo renovations.
  • USDA Rural Development Home Repair Loans – USDA offers renovation funding through the Rural Development program. It is meant to help the homebuyer secure decent housing. You can use the financial assistance to cover foundations, new appliances, roofing, plumbing improvements, electrical improvements and many other upgrades that are needed for safety and health reasons. Eligibility is based on rural location and income.
  • FHA 203 (k) – Similarly to the HomeStyle loan above, this is a government-backed home improvement loan that is open for the buyers that have low credit scores. Options are more expensive since the FHA mortgages have really high insurance premiers if the down payments are smaller. Mortgages have upfront fees that are included in loan principal.
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When it is impossible for you to use cash or savings to fund home renovations, home improvement loans can be considered but they are not a single option. There are also other opportunities to consider like home equity loan or HELOC (home equity line of credit). These are better than personal loans as they are much more affordable.

When Should The Home Improvement Loan Be Considered?

You need to consider borrowing money and getting your loan for home renovations just if you are confident about the fact that the projects is going to reduce long-term ownership costs or will increase property value. There are home renovation projects that do increase property value by more than what you spend. For instance, we can mention basements, front doors, bathrooms and attic insulation.

Home renovation loans can also be a good idea if you can save money through the repairs on the long run or if you want to make the home safer. This includes new siding, roof repairs and updating windows.

In addition, you will most likely need a loan when you need to rent some more expensive equipment. As an example, when you want to renovate the exterior of your house, you surely at least need something like portable scaffolding Canberra services. You should never sacrifice on safety, no matter what costs are involved.

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Make sure that you are careful about investing too much money in remodeling. This is because you may end up making the house too expensive when compared to the neighborhood’s similar properties. Always consider upper range homes in the area. If you spend too much you can end up pushing price beyond buyer expectations.

Never rush renovations and improvements. You want to meet with various lenders, know all available rates and keep in mind that remodeling can often end up more time-consuming and expensive than what you originally thought. Your finances need to handle home loan burdens.

Home Improvement Loan Alternatives

Just as with every single loan option out there, there are alternatives to home improvement loans that can be considered. For starters, if your credit is healthy and the project you have in mind is not expensive, the credit card that has no-interest period can easily be considered as a good alternative. Try to isolate improvement costs on one credit card that is different than usual spending so you can properly control it.

Another alternative is cash-out refinancing, which means you refinance the mortgage at higher loan amounts. The extra money is used for renovation. This is a really good option if you have over 20 percent home equity, your credit score is good and there are options available with low interest rates. Always look carefully at lenders, current rates and equity before refinancing is considered.