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Key Things to Know About Home Improvement Loans

As the name suggests, a home improvement loan is money borrowed by an individual to renovate their home. Mostly, these kinds of loans are unsecured, which means no collateral is attached to them. However, there are multiple types of home improvement loans for repairs and remodels. Despite this concept being a common one, there are many who may be unaware of the nitty-gritty of home improvement loans. Here are some important details about such loans.

How to apply for home improvement loans
Applying for a home improvement loan is an easy process, which includes the following steps:

The first step involves loan-seeking individuals researching the various options to fund their home renovations, repairs, and remodels. Essentially, there are four options through which homeowners can fund their repairs and renovations:

Home equity loans
Home equity loans, in which borrowers can take up to 85% of the home equity as a lump sum loan, are also a good option to consider. However, this type of loan is secured by the borrower’s home value, so an inability to make repayments comes with the risk of losing one’s home to loan foreclosure.

HELOC
Home equity lines of credit (HELOC) also involve putting one’s home up as collateral, but this scheme acts as a credit card. Money can be drawn as needed, making it a good option for variable budgets.

Personal finance
Individuals with set budgets can also check out personal loans that come with monthly payments and fixed interest rates.

Credit cards
For those with a spend-as-you-go approach, credit cards are an excellent way to borrow money for home renovations.

After selecting the type of loan one needs, homeowners can check and compare all the lenders, their respective interest rates, borrower requirements, loan terms, eligibility criteria, and charges. Loan seekers must also factor in aspects such as the maximum amount that can be borrowed and the repayment structure of the loan.

Taking the right kind of loan is important to make the most of home improvement loans. For instance, for large renovation projects, a credit line or credit card may be insufficient. In such cases, it is wise to use home equity loan options. For projects that need to be completed quickly, one can use the credit line or credit card options.

After zeroing in on the type of loan and lending option one wants, homeowners can gather documentation as a general loan sanctioning requirement. Some basic documents may be needed, including a copy of the valid ID, passport, or driver’s license; proof of income, such as tax returns and pay stubs; and proof of residence, including utility bills and bank statements received in one’s residential address.

Other documents that show details about the loan seeker’s current debts, total income, and housing payment also play a part in the interest rates and deposit amount they will need to pay to get the loan.

Moreover, one can try to get through a prequalification process while applying for home improvement loans. Only a few lenders offer borrowers this option, so for the ones that do, borrowers can take full advantage of prequalification. In this step, one can receive quotes for their loans that enable them to preview their chances for approval, the total cost of taking a home improvement loan, and predicted interest rates. Also, prequalification does not involve hard credit checks, which means it will not affect the loan seeker’s credit score.

All in all, this is a fairly straightforward process to receive loans for major home renovation projects.

When are home improvement loans useful?
Some of the useful aspects of home improvement loans are as follows:

Adding value to property
Home improvements add a significant percentage to the overall market value of a property. A renovated home is a sign that the owner is maintaining the property well, so it is important to avail of home improvement loans if required to enhance the value of the home.

Potentially reducing the tax bill
Certain home improvement loans reduce one’s tax bill. Home equity loans and credit lines are tax deductible when the money is used to improve one’s home substantially. However, there are many terms and conditions involved in this. So, consulting a tax professional can help.

Improving quality of life
Home improvement loans help improve one’s quality of life by enhancing the aesthetics and usability of one’s home.

Who provides home improvement loans?
HELOC lenders, banks, credit unions, government lending bodies, credit card companies, and similar other financial institutions offer home improvement loans.

What does the loan’s payout structure look like?

The payout of home improvement loans could be based on equity, cash, or credit lines. The basic payout of the loan depends on various aspects, including the interest rates and loan amount needed.
Some loans are secured, so their payout comes with the need to attach collateral (house or other property) before receiving the money from the lender.

Other loans are unsecured in nature, meaning they do not come with the risk of collateral and foreclosure. Generally, secured loans carry lower interest rates than unsecured ones.

What are the differences between home improvement loans and other loans?
Generally, personal loans are suitable for people who are doing minor renovation projects that get completed quickly. These loans, with their high interest rates and repayments, are perfect for that aspect.

Home improvement loans are useful for those who plan larger renovation projects and, therefore, need lower interest repayment rates and greater flexibility in returning the borrowed money. This is the main difference between home improvement loans and personal loans.

Disclaimer:

The information available on this website is a compilation of research, available data, expert advice, and statistics. However, the information in the articles may vary depending on what specific individuals or financial institutions will have to offer. The information on the website may not remain relevant due to changing financial scenarios; and so, we would like to inform readers that we are not accountable for varying opinions or inaccuracies. The ideas and suggestions covered on the website are solely those of the website teams, and it is recommended that advice from a financial professional be considered before making any decisions.

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