Home renovation projects, even minor remodeling plans, can cost plenty of money. Fortunately, homeowners have the option of applying for a home improvement loan to access funds needed to fix up their homes.
In this article, we'll go over the different types of renovation loans, how home renovation loans work, and three things to consider before applying for a loan.
Types of Home Renovation Loans
There are five types of home renovation loans available for homeowners, including personal loans, home equity loans, HELOC, cash-out refinance, and FHA 203k rehab loans.
Personal Loan
Home renovation personal loans are unsecured loans that can be used for remodeling projects. These loans typically have a 25% average interest rate and come with origination feed or upfront charges for processing and funding the loan. The fees are often 3% to 5% of the loan amount. Having said that, personal loans are easier to qualify for, especially for homeowners with good credit.
Home Equity Loan
Home equity loans let homeowners borrow against the equity they built up in their homes. This type of loan comes with fixed interest rates averaging 3% to 15%. The interest rate depends on the borrower's creditworthiness and the loan term.
Home equity loans are typically given as a lump sum. Borrowers are required to use their homes as collateral.
Home Equity Lines of Credit (HELOC)
Like a home equity loan, a HELOC allows borrowers to draw funds from the equity they built up in their homes. However, instead of receiving a lump sum, HELOC loans allow homeowners to draw funds as needed.
HELOC loans have variable interest rates that may start lower than those of home equity loans but increase over time. Similar to home equity loans, homebuyers are required to use their house as collateral.
Cash-Out Refinance
When you apply for a cash-out refinance, you are replacing your existing mortgage with a new one that carries a higher balance. The new loan's interest rate will depend on the borrower's creditworthiness and the current market rates.
FHA Rehab Loans
FHA rehab loans are loans insured by the Federal Housing Administration. This type of loan allows homeowners to finance their renovation projects with a single mortgage. It is worth noting that FHA loans have specific requirements for the types of renovations that can be financed. There are also limits to the maximum loan amount you can borrow.
What To Consider Before Applying for a Home Renovation Loan?
Before applying for a home renovation loan, there are three key things to consider, including:
Project Benefits
Before applying for a loan, you should consider how the renovation project will benefit your home and you. Will adding attic insulation reduce your long-term heating cost and increase the value of your property? Will a new siding make your home weatherproof, energy-efficient, and safe?
Eligibility
It is crucial to do some research before applying for a loan. To ensure a hassle-free process, ensure that you meet the requirements and are qualified for the loan. While researching, it is recommended to also review any documentation related to your income and financials.
Apply for the Loan Best Suited to Your Needs
When you have your documents ready, the next step to take is to research and find the type of loan that best suits your needs and financials.
