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How To Pick The Right Home Improvement Loan

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How To Pick The Right Home Improvement Loan

Whether you’re giving your home an overdue renovation or prepping to sell, home improvements are a great way to bring value to your residence. Depending on the size of the renovation, you may need additional funds for pay for the project.

Home improvement loans are one way to obtain the capital you need for these changes, and selecting the right one is as simple as assessing your needs.

2 Types Of Home Improvement Loans

Most individuals renovating their home turn to two specific loan options to fund a project. Personal loans and home equity loans are the most popular options, and each corresponds to a type of improvement made on a home.

To avoid paying back more than you needed to borrow initially, some basic research will help you decide what loan type is best for you.

Home equity loans allow you to borrow on the equity you have built up in your home. As you pay off your mortgage each month, you gain equity — or ownership — in your home. The more of your house that you own, the more you can borrow.

Lenders usually only allow you to borrow from 80 percent of a home’s value that's been paid off, according to Debt.org.

This makes home equity loans great for funding larger projects that require plenty of upfront capital.

If you have owned your home for a good amount of time and have equity from which to borrow, this type of loan may be best for you. Also, if you want to pay off the loan with a lower interest rate, home equity loans tend to be offered at a low interest rate with a repayment period of a decade or more.

If you need funds for your renovation and you haven’t owned your home for a significant amount of time, a personal loan may be your best option. Personal loans are unsecured: this means that the money you are borrowing is not backed by anything.

Unlike a home equity loan, if you don’t pay back the loan, the lender can’t take your house to recoup their loss.

This means that the amount you’re likely to be able to borrow with a personal loan is less than a home equity loan, making it perfect for smaller projects. Also, you’ll probably be offered a higher interest rate, and approval is based on your financial profile — including credit score, income and more. Personal loans also usually have a shorter repayment period than home equity loans.

What If I Don't Pick The Right Loan?

To help you make the right choice initially, it’s important to plan your renovation. Do you know the timeline of the project? What is it going to cost?

Making a temporary budget of everything you’d need to purchase can help you estimate the total cost of the project. Also, consider how long you can feasibly see yourself making loan payments.

If you fund a smaller project with a home equity loan, you may be paying off the loan decades down the line if you only make the minimum monthly payment. Thought the interest rates on these loans are relatively low, the interest will still add up over the years.

When applying for the loan, you may incur many fees, including the application fee, appraisal fee, credit report fee, and more, depending on the lender. If you are going to tap into your home equity, make sure your project is substantial enough to require such a move.

Selecting a personal loan for a bigger project could cause you to fall short. Depending on where you apply, according to U.S. News, the maximum personal loan amount is between $5,000 and $100,000. If you skip planning ahead and making a budget, you could find halfway through that you need more capital to finish. This leaves you with funding the rest with cash you may not have, a credit card or another loan.

Do Your Research

A lot of prep work can be done before seeking the funds for a project. Take a look at what you want to do to your house; the timeline of the project; the estimated added value; and your financial future.

Taking all these elements into consideration, decide how much money you will need and how far into the future you’d like to be making payments.

Posted-In: home improvement loans U.S. NewsEducation Personal Finance General Real Estate Best of Benzinga

 

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