Remodeling your home is an American tradition. Blowing out that back wall to build the kitchen of your dreams, no problem. Thinking of building that man cave?Go for it.In fact, the challenge isn’t coming up with ideas on how to improve your house.It is figuring out how to pay for it.With that in mind, let’s review what you need to know about home improvement loans.
Bank or Broker?
For years, banks have been the go-to option for mortgages. Isn’t this what they are supposed to do? Yes and no.Actually, if you haven’t reached out to a mortgage broker, you might want to give it a shot.While the mortgage officer at your local bank can only choose from the loans and programs offered by their bank, a mortgage broker can choose from multiple lenders.In this way, they can help you find the best possible loan to meet your needs at the best possible rate. Maybe it is a home equity line, even a Federal Housing Administration (FHA) loan.
Regardless of whether you choose a bank or a broker for your loan, there are a couple things you need to know about your home improvement loan before you get started.Such as, determining how much money do you need and identifying the best lenders based on your current situation.
How Much Money Do I Need?
This starts with putting together a detailed estimate on the home improvement work you want to do.If you are hiring a contractor, then they will provide you with this information.If you are doing the work yourself, then you will need to think about the materials you will need to complete your dream project.Once you have your home improvement budget, you will want to add 15% to 20% for unexpected surprises.
Once you know how much you will need then you need to figure out how you will pay for it.You see a home improvement loan is based on the current equity you have in your house today, not the home’s future value.Figuring out current equity is rather simple.Look at your monthly mortgage statement and it will tell you the current balance on your mortgage.Then take a look at similar homes in your neighborhood which sold in the last six months.This will give you a rough idea of how much your home would be worth today.
Granted, the final estimate of your home’s value will be calculated by a Certified General Appraiser.But their report will cost money, so for the first step you can check by yourself or ask your local real estate agent for a quick estimate.
The difference between how much you owe on your mortgage and the market value of your home is the equity you have in have in your home.Now keep in mind that most lenders will not lend up to 100% of a home’s value.But if the amount of your current mortgage and the cost of your home improvement work out to be less than 85% of your home’s value, then you are in a good position.
One you have this information you will want to check your credit score. All three credit bureaus will let you check your credit score for a minor fee and this is a good way to know where you stand before you approach a lender. Did you know, every time a lender checks your credit it ends up on your credit report?As such, check your score first and provide a lender with the information during the prequalification phase.This way they will only pull your credit one time.
What’s the Best Deal for Me?
Now it is time to approach a lender to find our which programs offer the best home improvement loan rates. Don’t forget to ask about FHA home improvement loans and Veterans Administration (VA) loans.These home improvement loans are guaranteed by the government and depending of the specifics of your loan, they might offer better rates than traditional bank loans.
There are a few ways to get the best rate for your home improvement project.The first is to refinance your existing mortgage and take out some extra equity to pay for the project.While this is a good idea for some, it depends on the specifics of your first mortgage.
Another option is a home equity loan.These work just like a mortgage, except you don’t need to pay the closing costs associated with a refinance. The length of a home equity loan usually runs 15 to 30 years.But the rates tend to be higher than mortgages.
Then there is the home equity line of credit.Imagine this as a checking account based on the value of your house.While there are no closing costs, the interest rates are usually variable and in most cases, you need to repay the line within 8 to 10 years.The advantage of a line is that it allows you reuse the funds available on the line one it is paid off.This can be a big plus if you are planning to do several home improvement projects.