The home is where we spend the vast majority of our lives. It’s a place that should be comfortable and inviting, but sometimes something breaks, or there is a new addition to make your home feel fresh again! For many homeowners, this means making some change – a bathroom makeover or adding an extra bedroom for the kids. Whatever it may be, you’ll need to pay for the project somehow. This blog post will help you understand your financing options and ensure you get the right type of loan for your needs.
What types of loans are there?
First, there’s the good old-fashioned bank loan, but those can often be difficult to qualify for and slow to approve. Second, you can use credit cards to finance your home improvements, but the interest rates are often sky-high. Then, there are home improvement loans.
What types of home improvement loans are there?
1. Home Equity Loan
A home equity loan is a fixed-rate, long-term mortgage (30 years) that’s based on the value of your home. You’ll need to have at least 20 percent equity in your property before you can take out this type of loan for improvements. The advantages are that you’ll only pay a certain amount each month over a specified amount of time. This type of loan is great for large expenses that you’d prefer to spread the cost out over many years.
2. Home Improvement Loan
A home improvement loan is a short-term, low-interest rate loan that’s often used for home renovations. The advantage of this type of loan is that you don’t need to come up with upfront funds and quickly get the money. However, there are some disadvantages as well. Often these loans have higher interest rates than other types of mortgages, such as the home equity loan. However, if you don’t have enough equity built up in your home to qualify for a home equity loan, consider a renovation loan as a great option.
3. Home Equity Line of Credit
A home equity line of credit is another type of loan to finance your projects. Similar to a credit card, but with a much lower interest rate. It’s also a good option because it offers “unsecured” personal loans, meaning you don’t need any other collateral besides the value in your home. However, since you are borrowing against the equity in your home, you’ll need to own a sufficient portion of your home before you can take advantage of this type of home improvement loan.
4. Federal Housing Administration (FHA) 203k Loan
If you’re looking to purchase a home and need some repairs, the FHA 203k loan may be an option for your situation. This type of loan allows you to put more money down than normal on a property and then use that cash towards improving the property’s value. The advantage is that this type of loan only requires as little as a five percent down payment. If you want to make improvements to your current home, don’t worry, the FHA 203k loan works for refinancing, too.
We hope that these tips helped and answered any of your questions about the type of loans you should consider for your projects at home! Are you curious about how your home improvement project might affect your home’s value? Check out our blog post on the best and worst home improvement projects for return on investment.
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