What to know about getting a loan for home improvement
One of the coolest things about owning your own home is the fact that you’re allowed to modify or improve it pretty much whenever and however you want. On the other hand, major renovations can be pretty expensive. You may need help paying for your efforts.
You have a few options when paying for home renovation. If you’re already planning the improvements before closing on the house you can finance them upon purchase and the cost will be tacked onto your mortgage. Otherwise, you need cash – and that usually means another mortgage. Here’s what you need to know about getting a loan for home improvement:
Before you begin: make sure it’s worth it
Renovations cost a lot of money, but sometimes they can add value to a property. It’s relatively common to add upgrades to a home in order to increase chances of selling at a higher price. Sometimes, home improvements are about enjoyment of the home with new features. Whatever your reason, make sure you’re not pouring money into a remodel or renovation that will cost far more than it is worth.
Consider your insurance costs
Before you even apply for the loan, you need to inform your insurance company of your upcoming renovations to ensure you’re fully insured while all that activity is going on in your home. Your coverage changes when there’s work being done to a home, so be prepared to temporarily pay a higher rate. Things can go wrong when doing extensive construction on a building. If your home gets damaged, or your property gets stolen, or if someone gets hurt, you’re going to want to be sure you’re covered.
Financing options
Now we’re to the real nitty-gritty of getting a loan for home improvement. Regardless of how you do it, borrowing money requires that the lender see proof that you are likely to repay your debt. Make sure you have a decent credit standing before you apply. Look at the options available to you, and figure out which will be the best choice for your home improvement financing:
- Credit card: For smaller expenses that you know you can pay off quickly, it might be easiest to use your credit card. Avoid carrying a balance, or use a special financing promotion to do the work so you don’t pay a high interest rate.
- Personal loan (unsecured): Personal loans can be used for a variety of purposes. If you have good credit, you can get a fairly low interest rate compared to credit cards. When you take out a personal loan you’ll be put on a repayment schedule with a (usually) fixed interest rate. Once you pay off your loan over anywhere from one to five years, you need to apply again to borrow funds if you need it.
- Line of credit (unsecured): A line of credit is a lot like a credit card, but without the plastic. The interest rate is usually lower than with credit card, too. Instead of a repayment plan, you are given access to a certain amount of funds and only need to pay back what you use. Monthly statements help you track your spending and can be ideal for long-term projects, offering increased flexibility and longevity.
- Home equity loan or line of credit (secured): An unsecured loan or line of credit doesn’t require collateral. The higher risk means a higher interest rate. If you have enough equity in your home, you can secure a loan with the house. This is a home equity loan, with fixed payments, or a home equity line of credit. You can get a lower interest rate, but your home is on the line, so be careful.
A general rule of thumb is that loans are better for singular projects with fixed costs and end dates. Lines of credit are better if you are working on the house over time and aren’t sure of the final end date or cost.