Pros & Cons of Home Renovation Loan Programs


home renovation loan

A home renovation loan can be the perfect way to finance your home improvement projects. It is not as difficult to get one as it may sound. In fact, many people are taking out a home renovation loan today. However, there are some important things that you should know before you decide to take out a home renovation loan to finance your home renovation plans. A home renovation loan is essentially an unsecured loan that you’d use for home renovation projects like home improvements or remodeling projects.

Before you get a home renovation loan, you first need to refinance. This is essentially the “first mortgage cash-out.” Refinancing is when you refinance your current home equity into a new home loan. Planning out a home renovation project is obviously a big job. You need to do it correctly, and if you refinance now, while your project is still in the planning stage, you’ll get a big financial benefit when it’s time to sell.

Unfortunately, not all lenders are willing to provide great home renovation loan deals. There are certainly bad apples in the basket, so you need to watch out for them. Look for lenders who are high quality and provide competitive terms and interest rates. There are a few reliable sources for finding good lenders to work with: junk-mail lists, mortgage brokers, financial institutions, real estate agents, Internet searches for “home loans,” etc.

Home Renovation Loan

A dining room table in front of a window

There are also benefits to getting a home renovation financing loan early in the process. Lenders often offer very low-interest rates to borrowers who apply and get approved early in the application process. However, don’t get caught up in the interest rate; consider the benefits of the loan too. If you can pay off some costs right away, do so. You may even be able to save money on closing costs by paying down the balance in a hurry.

207k The first thing you need to consider when getting home improvement loan financing is whether or not you are a good candidate for the loan. High credit score, steady employment, proven track record, and an ability to repay the loan are the main criteria lenders look for. Here are some examples:

207k If you have less-than-perfect credit, or if you are looking at getting a loan for home equity improvements, remember that it’s possible to get subprime loan terms. For instance, most traditional mortgages come with adjustable interest rates, which means they can rise and fall with the market. As such, people with credit problems or those who are looking to get a cash-out to refinance loan terms for home equity improvements may have to settle for standard interest rates.

207k Still, the better loan terms you get, the sooner you will be able to close on the home improvement financing. The easiest way for you to check your credit score is to get a free credit report once a year from one of the three major credit reporting agencies (Experian, Equifax, or TransUnion).

Some Other Facts

208 Once you know where you stand, talk to your mortgage credit score specialist about getting a second mortgage or refinancing to reduce the payment. You can also inquire about no-money-down “launch pads” that would allow you to increase your cash flow before you even start. Such launches have a very small risk, but if you need a large cash influx, they could delay the actual purchase you want.

207k When it comes to the home-renovation loan, many people wonder if they can qualify for such financing. Usually, the answer is yes. However, there are a few criteria that can limit the amount and type of equity finance that a would-be homeowner may qualify for.

208 For example, if you have variable-rate mortgages, or are up against a cap on the interest rate you can charge, you may not be able to apply for a conventional loan. Many home-renovation cons people run into are the inability to obtain fixed interest rate loans or to refinance their existing mortgage insurance policies. Fixed interest rate loans tend to have a lower monthly payment, but they are riskier because the interest rate can rise sharply should interest rates suddenly drop.

209 Also, people with poor credit histories may not be able to get traditional financing, especially from conventional lenders. If you can find some way to work around these obstacles, however, you can often save quite a bit of money on a home improvement loan or some other kind of financing. One thing to keep in mind is that the people who can benefit the most from these kinds of loans are people with the best credit histories. If your credit is so poor that you are unable to get a standard home improvement loan, then you definitely need to approach a number of credit unions or local lenders about getting a home improvement loan.

A Much Ado

20 Another type of potential borrower is the person who is just looking to expand their home-renovation portfolio. Home-renovation loans are available for just about anyone who wants them, as long as he or she has sufficient income and the financial means to repay the loan. In other words, home-renovation loans are specifically designed for those who are looking to expand their home remodeling activities. You may have to show lenders certain financial documents, such as a clearly outlined budget for your planned renovations.

21 If you are planning to use a cash-out refinance to pay for home repairs or expansions, then you should consider using a cash-out refinance loan instead of a conventional loan. For one thing, you will get cash right away without paying interest on it. Secondly, many lenders require that you have sold a property within the last three years before qualifying for a cash-out refinance. If you have not made a sale in the last three years, however, most lenders will not even give you a second look.

Home equity loans can be risky business for homeowners who are not sure if they will be able to service the loan, especially when interest rates are rising. These loans are not adjustable-rate mortgages (ARM), which automatically go up in interest rates when the economy is struggling. Instead, they have secured loans that come with fixed interest rates and financing fees for the life of the loan. Many people choose this option when they want instant cash and do not have to wait for their initial home equity loan to pay off. The downside to these loans is that they are usually very expensive, have very strict lending requirements, and may carry closing costs that can total thousands of dollars.

Final Thoughts

Some homeowners will use home equity loans for major home improvements such as a kitchen or bathroom, but they should be used sparingly, as they carry the highest risk. Home renovation loans can also help alleviate short-term cash flow problems. Many credit cards offer cash-out refinance options that do not require a down payment, which can be a good alternative to home equity loans for high-interest projects. The pros and cons of these two loan programs will vary depending on the homeowner’s situation. To better understand how these two loan programs interact, it is important to look at their differences.

Fixed interest rates and no closing costs make home equity loans attractive to borrowers who need immediate cash and do not want to worry about repayment after the project is complete. There are drawbacks, however, such as very high-interest rates and very strict lending requirements. Before deciding if a cash-out refinance is right for you, discuss your individual circumstances with a financial adviser to determine if a home equity loan would be the best option for your situation.

Subscribe to our monthly Newsletter
Subscribe to our monthly Newsletter