Financing Your Home Improvements With A Home Improvement Loan

Whether you live in a home you have purchased yourself or a rental accommodation, where you hang your hat is still your home. In this regard, either because you simply want to preserve the value of your home, or because you have the feeling that you would like to upgrade your home, you feel your home could do with some home improvements.

It’s likely, however, that any major improvements on your home are going to be costly; so, to ease the pain of having to pay for all of these home improvements in one hit, out of your savings, you consider taking out that home improvement loan that you’ve been hearing so much about. Before you do this though, you may want to consider the following:

Financing A Home Improvement Loan
Although “home improvement loans” are usually called exactly that, the form they can come in can vary vastly. Ordinarily (in their general level of seriousness), home improvement loans can be funded via:

A home equity loan
With a home equity loan you borrow money from a lender based on the appraised value of your home. As the name suggests, a “home equity loan” is a loan granted on the strength of the equity in your home. Here, “equity” means the sum of the value of your home in excess of any outstanding mortgage debt. Besides any existing “equity” your home may have prior to the home improvements, your lender will also likely agree to include the additional value of your home post the improvements in its calculation of “equity”. In return for providing you with a home equity loan, your lender is likely going to ask you to provide them with a second mortgage on your home – so make sure that you can you repay this loan, otherwise you run the risk of losing your home!

A home refinancing loan
Unlike a home equity loan, which is seen as a form of second mortgage, financing your home improvements by way of a home refinancing loan essentially means that you refinance your existing mortgage at a lower rate than previously, leaving you with excess cash with which to use as a home improvement loan. A home-refinancing loan is usually a favorite way of funding a home improvement loan with lenders who are currently paying a high rate of interest on their existing mortgage – especially if the mortgage is a fixed rate mortgage.

An unsecured personal loan
Based on the assumption that your home improvements are not going to be excessive in costs, you might want to consider funding the improvements via an unsecured personal loan. The advantage of doing things this way is that you do not run the risk of losing your home with the additional borrowing you take out to finance your home improvements. On the other hand, the downside is that you’ll likely need to pay a higher rate of interest than would be the case if your home improvement loan were a secured loan.

A Title I home improvement loan
A Title I home improvement loan is a loan provided by a regular lender, such as bank or loan association, but which is insured by the US Department of Housing and Urban Development. Assuming you are granted such a loan, you can borrow up to a maximum of US$25,000, which you have to agree to repay monthly over a maximum period of 20 years.

Asset loans
Certain banks and loan associations will allow you to have a home improvement loan against your assets, such as a 401(k) or share portfolio. Whilst this is a method of borrowing, it is rarely a good way to fund your home improvement unless you are one hundred percent certain you’ll have no problems making the repayments as you may well be chancing your future savings.

Fees, Costs and Penalties
When you agree to a home improvement loan with your lender, be sure to check with your lender that you are not required to pay any annual fees and penalties if you decide to prepay the home improvement loan. Also make sure that you check what the annual percentage rate (APR) on your loan is going to be. Once you have all the facts regarding the charges your lender will make you pay, you’ll be in a position to decide which lender to use.

Paying For Your Home Improvements – The Contractor
Once your lender has approved your home improvement loan, you need to enter into an agreement with your contractor to undertake the work. When you do this, it is strongly suggested that you do not agree to pay your contractor for the job all at once up-front; but, rather, you agree with the contractor to pay the contractor in step payments – upon completion of each section of the home improvement job. This way, you’ll be able to keep some control over your contractor, ensuring that your contractor has a good incentive to complete the job in a timely and professional manner.

Home improvements and planning permission
With any home improvements, you need to keep in mind that you may be required to obtain planning permission from your local authority before you proceed with applying for the home improvement loan or hiring the contractor. Consequently, there is absolutely no point in obtaining the home improvement loan and hiring the contractor to build you a greenhouse if it later transpires that you need planning permission to do this; otherwise you may well find you are repaying a home improvement loan without any home improvements having been done on your home!

And Finally
Finally, to wrap-up, here are some of things you need to keep in mind when considering whether or not to pay for your new home improvements with a home improvements loan:
• what type of home improvement loan am I going to apply for: (i) home equity loan, (ii) home refinance loan; (iii) unsecured personal loan; (iv) Title I home improvement loan; or (v) asset loan;
• are there any fees and costs involved – especially with regard to prepayment;
• do I need insurance;
• don’t pay the contractor the whole fee upfront; and
• do I need planning permission for the home improvements?
 

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