What are Home Improvement Loans?
Home improvement loans, also known as home renovation loans, are a general term that refers to how a loan is used, rather than the specific loan product. Home improvement loans can be used to finance renovations and repairs to a house. These loans can be used to renovate a bathroom or to replace appliances.
Unsecured Personal Loans to Home Improvements
Personal loan lenders often advertise loans as home improvements loans because many people like to borrow personal loans to pay for home improvement projects.
Personal loans are usually unsecured loans. This means that they don’t require collateral. Instead, the lender evaluates your income and credit scores to determine your eligibility. Jacob Channel, senior economic analyst at LendingTree, says that this is a significant benefit.
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Channel says that the biggest benefit of a personal loan is that you can get cash quickly and don’t need to place collateral. The risk of losing your home is not present if you default. These loans can be an option for those who don’t have equity or have poor credit, as there are lenders that will work with all credit levels.
Home Equity Loans
A home equity loan is another loan option that is commonly advertised for home improvement projects. Home equity loans allow homeowners to borrow against their equity to obtain a lump sum to pay for home renovations or repairs. Home equity loans are sometimes called second mortgages because they add to your existing mortgage and are also secured by your home.
Madison Block, senior marketing communications associate at American Consumer Credit Counseling (a non-profit credit counseling agency), says that home equity loans are attractive because they offer lower rates and flexible repayment options.
Block says that home equity loans have a longer term than personal loans. Your payment will be lower as you have more time to pay it back.
How to get the right home improvement loan
Consider these factors when deciding on the right home improvement loan for you:
- Collateral: Home equity loans can be used as collateral for personal loans that are usually unsecured. Channel warns that home equity loans can be risky if they are too large. If you aren’t sure you can repay the loan, it is not something you should do. However, home equity loans have been used by millions of people to great success.
- Loan amount: A home equity loan might be better suited for you if you have a major home improvement project in mind. While some lenders offer personal loans upto $100,000, the majority of lenders limit loan amounts to $50,000. Block says that a home equity loan can often get you significantly more money.
- Interest rates: Home equity loans have lower interest rates because they are secured. Channel says that home equity loans often have lower interest rates which makes them easier to repay each month. Your rate will depend on your credit score and income. Rates can reach as high as 35.99% for an unsecured personal loan.
Personal loans typically have repayment terms of two to seven years. Home equity loans have a longer repayment term — sometimes as long as thirty years — which allows you to pay a lower monthly amount. Block warns that if you have to pay the loan off for a longer period of time, you will pay more interest. It’s best to choose the shortest possible loan term.
The speed at which you require the funds. How soon you intend to start your home improvement projects can impact the type of loan that you choose. A home equity loan can take between two and six weeks. This is because you will need to complete additional steps such as an appraisal of the house. Personal loans, on the other hand, take a few days to process and many online lenders can disburse your money within a matter of days.
How to get a home improvement loan
It’s possible to obtain a loan for home improvements if you aren’t sure how to do it. It takes just a few simple steps to get a loan.
Get estimates from several contractors to determine how much you will need for your renovations. Get as many as five estimates to get a good idea of the amount you need.
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You can check your credit. Check your credit score, credit report and credit history to see where you stand. Fair credit and bad credit can lead to higher interest rates and more difficult loan approvals. It may be a better idea to wait until your credit score has improved before you apply for a loan for home improvements.
You can identify the best financing option for your needs based on your renovation costs and credit score. A personal loan is a good option for small projects. A home equity loan is better for larger renovations because you can borrow more money and take out more time to repay it.
You should shop around. Whether you are looking for a personal loan or a home equity loan you shouldn’t pick the first one you see. Lender fees, rates, terms and terms can vary so it is worth comparing different lenders. You can check out your local credit union or bank, as well online lenders.
Gather all necessary documents: Your income, employment and, in the case of home equity loans, your house will be required by the lender. It is possible to save time by organizing these documents before you start the loan application.
What do I need to get a loan for home improvement?
The lender will require documentation to verify your income and identity when you apply for a loan for home improvements.
- For an unsecured personal loan, you will need to provide the following documents
- Identification such as a driver’s license or passport
- Social security number
- You will need to provide proof of income such as W-2 forms and tax returns.
- Contact information for employers
- Documents such as utility bills and mortgage statements can be used to prove your address.
- Additional documents you will need for a home equity loan
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The following documents are required if you apply for a home equity loan:
- Photo ID of homeowner insurance
- Most recent mortgage statement or property tax statement
- In some cases, proof of title insurance may be required.
- If the property is located in a flood zone, proof of flood insurance
- You may need to submit additional documents in addition to those listed above.