Get the Best Financing for Your Upcoming Home Improvements

Home improvement projects can be simultaneously invigorating and frustrating, but with the right advice, they should ultimately be a source of satisfaction. Of course, a successful project begins with an appropriate budget, and, for many homeowners, this means the right financing.

The Pre-Loan Budget Process

It doesn’t take long for improvement and renovation costs to build up. Even a fairly small job can quickly add up to hundreds or even thousands of dollars. Use the following tips as you prepare your budget:

Determine which improvements are worth an investment because they will increase the value of your home. For many homeowners, this means the basement and bathrooms. If you want to sell the home, look at rooms and areas that could prevent a quick sale and target those spots first.
Outline your project and write out a list of materials to buy and professionals to hire. If possible, find appliances, cabinetry, and other expensive items online, in clearance sections, and in used stores. You can also watch for sales if you have enough time.
Research prices for goods and services, as well as the pros and cons of doing part of the work yourself. If you are skilled at painting, flooring, and other home improvement tasks, you can keep a good chunk of the costs down.
Talk to a professional or experienced friend for tips and advice about where it’s safe to cut costs and how to do tasks correctly. If you end up DIYing something incorrectly, you may end up paying more when you have to redo the job or hire a professional for repairs.
Work out how much money you can realistically put toward the improvement. If you take out a loan, make sure you can afford the monthly payments.
Understand that most projects end up costing a third of or more than the original estimates. There will be adjustments, mistakes, and changes necessary throughout the process, so you need to be flexible regarding nearly all details of the project.

Home Improvement Financing Options

As you consider your financing options, keep an eye out for potential advantages and drawbacks. In general, the best home improvement loans have longer terms (sometimes as long as 12 years,) fixed payments, low interest rates, quick access to the funds, and minimal associated fees. Avoid loans with high minimum loan amounts, hefty origination, late and prepayment fees, and fluctuating interest rates.

Unsecured Personal Loans

With those tips in mind, look into home improvement loans. These loans are typically unsecured. This means you can be approved for the loan without providing collateral, and the approval process moves quickly. You could have the funds within days. These loans are generally available through banks, credit unions, and sometimes online providers.

Unsecured loans are riskier for lenders, so you may need to prove that you have a good credit history and that you’ll have the funds to repay the loan. You may end up with prepayment penalties and, if you make any payments late, you’ll also have some expensive late fees.

Home Equity Loans

If you have a lot of equity in your home (based on how much of the mortgage you’ve paid off), you can use that equity to pay for renovations and improvements. A home equity loan delivers a lump sum that you repay on a monthly basis. This is a great option if you’ve paid off a lot of your home loan and you’re only planning to do one big project. With your house as collateral, you are likely to get more money than you could for an unsecured loan. Some of the cons associated with this loan include the second monthly mortgage payment, origination fees, and closing costs.

Home Equity Lines of Credit

A HELOC often comes with a relatively low interest rate. As a line of credit, you only end up borrowing what you actually need as the project proceeds. You only repay the amount that actually spent plus the interest that accrued. The loan approval process for this type of financing usually doesn’t take long. An added benefit is that you can reuse any of the funds that you’ve repaid. This loan may be a good fit for you if you have a great credit score and steady income. Watch out for adjustable loan rates and changes to repayment terms.

Cash-Out Refinancing

If you’ve already paid off a healthy chunk of your original loan, you could refinance for a new mortgage loan. The new loan will be more than you currently owe, and the funds you receive aren’t limited to home improvement use. It is possible to adjust the term length of the loan, so you may pay off the new loan before the original loan was due. This type of loan is a good fit if you can get a much lower interest rate than you had on your initial mortgage. Be careful about closing costs, which may be significant.

FHA 203(k) Rehab Loans

This loan combines your existing mortgage with the new loan amount. Instead of applying for a whole new loan, you refinance your initial home purchase. These loans are a good choice if you are buying a fixer-upper.

Some of the advantages of FHA 203(k) rehab loans include government backing, low down payments, low interest rates, and relatively low credit score approval. However, you probably can’t get this loan for improvements to a newer home, and the minimum loan amount starts at $5000. You’ll also have to pay for mortgage insurance upfront and on a monthly basis. The money you receive from this loan must be used on specific improvement projects.

Loan Comparisons

Whatever loan you choose, it is often in your best interest to get pre-qualified. This knowledge helps you set reasonable expectations regarding your budget. It also gives you accurate information for building your budget. Be aware that pre-qualification is not pre-approval, so make sure that the loan officer is clear regarding whether you are approved before you begin any renovation work. Contact advisors at FHA Connection for more tips and information.