There are many different types of home improvement loans.
Whether you want to buy a fixer-upper and get money to make repairs, or you need a loan to renovate your existing home, there’s a home improvement loan program for you.
In this article, we’re going to go over the different types of home improvement loans there are available, their guidelines, and the pros and cons.
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Home Equity Loans
A home equity loan is a loan that users the homeowners’ equity as collateral. You can usually borrow up to 75% – 80% of the loan-to-value ratio. Most people use home equity loans to make renovations or repairs to their homes that will help increase the value of the property.
Home equity loans have a low-interest rate and require monthly payments over 4-5 years in most cases.
Home Equity Line of Credit (HELOC)
A home equity line of credit works very similarly to a home equity loan. Only instead of getting a lump sum up-front with a HELOC, the bank gives you a revolving credit line you can borrow cash from as you need it.
A benefit of a HELOC is that you can borrow only what you need when you need it. And you are only charged interest on the amount you borrow, not the entire credit line. A HELOC works very much like a revolving credit card does.
Pros and Cons of Home Equity Loans and HELOC
- Convert home equity into cash
- Lower interest rate than personal loans
- Use cash to pay off debt or make renovations to your home
- Reduces your equity stake in your home
- Has a higher interest rate than a mortgage
- Convert unsecured debt into debt secured by the home if used for debt consolidation
- Foreclosure possible if you default on payments
- High credit score needed (680+)
A cash-out refinance loan allows the borrower to tap into the equity in their home. Unlike a home equity loan, which is a second mortgage, a cash-out refinance is an entirely new mortgage. You will have just one lender and one loan to make payments on.
A cash-out refinance will give you cash for your equity up to 80% of the market value of the property. The advantage of a cash-out refi is that the interest rate is low, and the loan is repaid at the same time as your regular mortgage payment.
If you have an FHA loan or VA loan, there are VA, and FHA cash-out refinance programs available. The loan term is usually more favorable with these types of mortgage refinance when compared to a home equity loan because of the longer repayment term.
Usually, cash-out refinance mortgage loans have a 15 year or 30-year term. These loans are available at a fixed rate and an adjustable-rate mortgage.
Pros and Cons of Cash-out Refinance Loans
- A lower rate than home equity loans
- Get cash to pay off debt or make repairs to your home
- Interest may be tax-deductible
- Have one single mortgage payment
- Take advantage of the current low mortgage rates
- Lower credit score requirement than HELOC
- High closing costs
- Reduces the amount of equity you have in your home
- Home is at risk of foreclosure if you cannot make the payment
203k FHA Home Improvement Loans
If you are looking at buying a fixer-upper home and need a loan to purchase the house and make repairs look no further than the FHA 203k rehab loan.
A 203k loan is a renovation loan that gives you the money to purchase a home in need of repairs, plus additional cash to make the needed repairs or renovations.
You can get up to $35,000 cash for repairs with a streamline 203k loan. A standard 203k loan is needed for more extensive projects, including homes that require plumbing or foundation replacement or repair.
The qualifying guidelines for 203k loans are the same as an FHA loan; only the borrower needs a higher credit score because 203k lenders are providing a loan that exceeds 100% loan’-to-value in some cases. You need a 640 credit score for FHA 203k loans.
Personal Loans for Home Improvement
If you do not have enough equity in your home to qualify for a home equity loan or cash-out refinance, you can get a personal loan. Personal loans can provide up to $40,000 or more, allowing you to make repairs and renovations to your home.
All types of home improvement loans require fairly decent credit to qualify. If you have bad credit, you may not be able to attain any kind of loan. If you have low credit scores, you should work on improving your credit history before applying for a loan.
One thing you can do to quickly increase your credit rating before applying for a home improvement loan is to pay down your credit card balances. If you are carrying high balances, then your credit is being negatively affected. Try to keep your balances less than 15% of the credit limit to maximize your FICO scores.
Click here for more information on increasing your credit scores