Most homeowners will reach a point where their current home no longer meets their needs. When this happens, you might pause to consider the pros and cons of moving versus remodeling. Depending on your situation, it may make better sense to stay where your roots are, leading you to remodel rather than pull up stakes and move.
Once you’ve made that decision, it’s time to think about home improvement financing. The good news is that getting the funds you need to remodel your current home might be easier than you think. While it can be tough to navigate, the world of home improvement financing offers plenty of attractive options for your biggest investment.
What Are My Home Improvement Financing Options?
There are several different options for home improvement or home repair financing. Your decision will largely depend on your own financial situation, the extent of the remodel, your type of mortgage, and loan rates. Your options might include:
- Home equity loan: This option allows you to borrow from the equity in your home. It might be possible to borrow up to 100% of your home’s equity, especially if the home improvements add value.
- Home equity line of credit: This option also uses your home equity, but rather than a lump sum, you receive a revolving line of credit. If you’ll have ongoing projects and repairs over several years, this can be a good choice.
- Traditional mortgages: Depending on your ratio of your mortgage loan to home value, you may be able to refinance your mortgage with a set or adjustable rate and take cash out to pay for improvements.
- Energy efficient mortgage: If you need or want to make improvements that substantially increase your home’s energy efficiency, you may be entitled to special rates or incentives.
- B and C loan: If you have a thin credit history or lower credit score, B or C loans might help you rebuild your credit while you get the home improvement financing you need.
- Personal collateral loan: You might be able to get a better rate or a higher loan amount by using personal property as collateral to back up your loan.
- Same as Cash Loan: If these loans are paid back within the specified time frame, you can save money by not paying interest.
How Much Can I Borrow?
The amount of money you can borrow for your home improvement or home repair financing will depend on several factors, including:
- Your credit rating: Generally, a score of 740 or higher will let you borrow more at a lower rate.
- Loan-to-value ratio: The more your home is worth versus the amount you owe, the better your position to borrow as much as 100% of your equity.
- Debt-to-Income Ratio: This is the amount of debt you owe versus your income, and helps a bank estimate your ability to repay the loan.
- Interest rates: At times of higher loan rates, you may not be able to borrow as much as you would when rates are lower.
- Loan term: The longer your loan term (or the amount of time you have to repay it), the more affordable your monthly payments will be.
- Points: If you choose to pay “points” on your loan, you may get a better rate that could help you borrow more.
The best way to determine how much you can borrow is to get an estimate from your bank. They’ll usually have you fill out a form that includes your income and mortgage information, other financial obligations, credit score, etc. This will give you an accurate look at how much you’ll be able to borrow. In most cases, you’ll need to provide solid, accurate numbers to secure a loan and get an accurate picture of your best options.
Know Your Rights
One of the most important parts of getting home improvement financing or any other type of loan is to know your rights as a borrower. You have the right to upfront, clear information about loan terms, costs, rates, and more. But you also need to educate yourself by doing your own research and asking questions. Your loan officer should explain the terms of your loan in plain language, but if you are unclear about what it means to you, don’t be afraid to ask.
Knowing all of your options and your rights as a borrower will help you make better financial decisions. The sooner you learn about your home improvement financing options, the sooner you can get started on turning your current home into the home you’ve always dreamed of.
January 25, 2019