- 2 Dec 2021
- Reading time
- 3 minutes
A home renovation loan is a personal loan that is used to refinance home renovation and repairs. These renovations may range from a large project such as remodeling a kitchen, repainting the house or changing home furniture to lesser projects such as installing a new solar panel or fitting a door.
The repayment of a home renovation loan can be done in instalments depending on how much you borrowed, and the amount paid back remains the same so far you do not accrue extra charges or penalties. Most home renovation loans have a longer payment duration which could be around (10-15 years). Also, your qualification to a certain amount depends on your credit history. You can apply for a home renovation loan online.
If you are wondering how home improvement loans work, you may want to check some of these home improvement plans with their specific features. They include:
1. Home equity loans (HEL)
Your property equity is used as collateral. For home equity loans your home can be legally taken if you default in your payment. The interest rate is fixed and is lower compared to other home renovation loans. Also, the duration of the loan can last from 5 to 30 years and it can be used for home remodeling.
2. Home equity lines of credit
It is also known as HELOC, and it is very similar to home equity loans, but it works like a credit card. One of the advantages of home equity lines of credit is that you can borrow as much money as you think is necessary, also loans borrowed for home improvement can be deducted from your tax, but the interest rate is not fixed so the amount you pay every month may differ depending on the global interest rate.
3. Personal loan
You can consider taking a personal loan if you do not have the required equity in your property. It can also be used for financing your home renovation. Your house is not used as collateral so long you have a good credit history. They are readily accessible compared to other loans, which makes them suitable for urgent repairs like changing a broken door or fixing a leaking water pipe. One of the disadvantages of a personal loan is that it requires a higher interest rate which depends solely on credit score.
4. Cash-out refinance
The rate of interest is lower compared to HEL and HELOC. Part of the amount of money you get from cash-out refinance is from your home equity and you can use it for your home renovation. Also, the cash obtained can be used on other expenses such as the purchase of a new car or payment of debt.
What to Consider Before Applying for a Home Renovation Loan
1. Assess your project value
You need to consider if your project will add more value to the current state of your home or if it will reduce other expenses. You also need to consider the efficiency of the current state of your home and if the renovation will make it much more efficient. Lastly, you need to make sure the project increases the net worth of your home per-adventure you decide to sell the house.
2. Consider a personal loan for faster funding
The period of approval of personal loans is much extended in contrast with home equity loans. Also smaller amounts can be borrowed with a fixed rate of interest.
3. Consider your equity
Be sure you do not have larger debt compared to your home investment, this prevents you from borrowing the amount of money that you won't be to pay at the allocated time, at the same time this prevents you from over-investing in your home.
4. Ensure you have the right payment option
You must make sure that you can keep up with the repayment of the loan to prevent you from risking the home you've invested lots of money in. Failure to stick to the time frame for the payment of a home renovation loan can cause you to risk future loan opportunities.
5. Consider other options
There are several alternatives to a home loan with renovation some of which are;
· Saving for repairs: Consider deducting part of your monthly income and saving it up for future repair and emergencies.
· Using a credit card
If you are considering making changes to your living conditions to give you the comfortability and efficiency that you need, and you are thinking of how to get a home improvement loan, you may want to get an unsecured loan that does not require your home as the collateral. You can use a home renovation loan to make any changes to your home and it also helps to reduce your insurance rates.