Whether you’re moving into a brand-new place that’s a bit of a fixer-upper or you’re thinking about making some renovations on your home of many years, one of the biggest parts of the planning process is figuring out the financial element of home improvement. While the finances might not be your favorite part to think about, it’s important to address your needs early in the development process so you can move forward with creating your dream home.
One of the ways to finance a home improvement project is to take out a home improvement loan. Loans exist for pretty much everything nowadays, so it makes sense that you might be moving your thoughts in that direction. But what kinds of projects require a home improvement loan? Who is eligible for home improvement loans? And is that the right choice for you?
If you’re thinking about applying for a home improvement loan to renovate your home, there are a few things you may want to consider before you do. Here’s what you need to know about getting a home improvement loan.
What Is a Home Improvement Loan? Is It a Mortgage?
The very first thing you’ll probably find yourself asking when considering your budget for a remodel is what exactly a home improvement loan even is. Essentially, a home improvement loan is a loan you can get from the bank in order to make improvements on your home — as simple as you might expect.
However, it’s important to note that this is different from a mortgage or even a construction loan, so long as you aren’t building a home from scratch or purchasing a home in order to fix it up. If you do happen to be purchasing a home, your mortgage will be separate from your home improvement loan.
The Types of Loans Available
When it comes to home improvement loans, there are two main types of loans available — and those are personal loans and home equity loans.
Home equity loans help you leverage the equity of your home as loan collateral, which means you can then use this credit line for renovations or repairs. Home equity loans are short-term loans, though, so it’s a good idea to seek one out in advance rather than doing it right as you begin your project.
On the other hand, you have personal loans, which function just like any other personal loan — with a lender or your bank offering a payment plan to pay off your loan. Again, these types of loans also require a bit of advanced planning, so make sure you look into them before you jump into starting your project.
What Kind of Loan Do You Need?
If you’re deciding on what kind of loan you should get, there are a few factors you should consider while you take your first steps in your search.
For example, personal loans require excellent credit, although it is possible to get one with lower credit scores too. Personal loans also last for a bit longer than home equity loans. So if you’re looking for something a bit more long-term, that might be your way to go.
However, home equity loans are some of the most popular loans people tend to rely on for home improvement. This process tends to be a bit more involved than obtaining a personal loan, and the loans tend to last for shorter periods of time. If you’re looking for something a bit more short-term, this might be a better option for you.
Knowing Your Budget
No matter what kind of home renovation project you’re embarking on, having a budget for your goals is one of the most important things you can do. If you have specific projects in mind already, that’s great. If you don’t, planning out what you want to do is best kept for the front end of your planning process.
If you’re planning on DIY-ing most of your home yourself, you can do both small and large projects alike, from electrical work to painting and even basement renovations if you feel comfortable doing so. That can save you a bit of space in your budget when you don’t spend on labor costs.
However, if you’d rather go with construction or contracting company, discuss your plans and get your quote before you think about applying for a loan so that you can request the right amount for your home.
Is More Money Always Better?
However, this also brings up the question, “Isn’t it better to have more money?” and while you may certainly find yourself better off with a little extra stretch in a loan as opposed to a shortage, it isn’t always the best idea to go with the largest loan possible.
This is because you’ll have to pay the money back regardless, often with interest. This means that taking out a loan with too much extra room — even if you can afford it — will often lose you the money you didn’t need to give up. This drives home the point above: always plan out your budget and make sure you take out exactly what you need, or a close enough amount to that.
Alternative Funding Options
Whether you’re unsure of your security in your credit score or you’re thinking about alternative options so you don’t need to pay back interest or take on debt, there are other ways to fund your home improvement projects that don’t involve taking on the traditional loans mentioned above.
Options like cash-out refinancing, equity lines of credit, and saving up if you can manage to do that within your timeline are great options to consider. There are so many ways to fund your dream.
Home Improvement Loans
Home improvement loans are a great choice for so many people looking to renovate their living spaces. Whether your home is new or old and whether your credit is sky-high or in need of some work, there are many options available to you.
Whether you choose a home improvement loan or go in a completely different direction, you can make your dream home come to life.
by: Rose Morrison
Rose is the managing editor of Renovated and a real estate industry writer.