The Ins and Outs of Getting a Home Improvement Loan

If you’re a homeowner, you’ve probably spent more money on your home than you thought you would when you first purchased it. After all, owning a home isn’t cheap! There are mortgages and taxes to pay, repairs to make, and those extra surprises that catch you when you’re not looking, like busted water heaters or storm-damaged roofs.

However, most homeowners understand that – despite the expenses – owning a home in the United States is still a good investment for the most part, and many of us decide that it’s wise to spend a little extra money improving our homes now and then, whether the improvements are for our own enjoyment or for raising the price we’ll get when it’s time to sell it.

As such, thousands of Americans each year turn to home improvement loans to help them finance additions, upgrades, repairs, renovations, and more. But taking out such a loan is a big step and certainly adds to your responsibilities, so how can you be sure that you’re choosing the right loan for the right amount and with the terms that will be most beneficial to you?

How much should you borrow and for what?

Most realtors will tell you that home improvement loans should focus on projects that will “pay for themselves” when you sell your home. In other words, spend money on improvement projects that make a difference to prospective buyers, like new kitchens and bathrooms, which are the number one things buyers look for when considering a house for purchase. Of course, you might also need to borrow for necessary improvements, like a new roof or furnace, which are essential to everyday life.

Regardless of the reason for your loan, once you decide you want to move ahead, only borrow as much as you need. Some creditors will try to talk you into borrowing more, which could get you in over your head and create huge financial problems in the long run.

Financing your home improvements

Home equity loans

If you have equity in your home (the difference between what you owe and what your home is worth), getting a loan for home improvements will likely be pretty easy if you have good credit and a good payment history. This loan could come from your current mortgage company or another one, and it will likely provide you with the best rates available for such a loan, with your home being used as collateral. However, some homeowners don’t have equity and need to turn to other options like those listed here.

Home improvement loans

A so-called Home Improvement Loan is a form of personal loan that’s taken out for the purpose of enhancing your home. It can be secured (using your home or something else, like a car, for collateral) or unsecured. Those who are seeking unsecured loans usually need to have very good credit to obtain them.

For standard home improvement loans, you’ll pay an “origination fee”, which is usually about 5 percent of the loan amount and often lower than the closing costs you’d pay with a home equity loan. However, there’s often a cap on a personal home improvement loan, usually around $30,000. If your project demands more funds than that, you may be out of luck. Try a larger national bank rather than a small local establishment for your best bet on large amounts.

Title I loans

Title 1 loans are backed by HUD – the federal Department of Housing and Urban Development – and are available for certain improvements but not luxury options like pools or landscaping. The government doesn’t actually make the loan but guarantees them so that the lender is reimbursed a portion of the cash should the borrower default. APRs are lower and the qualifying criteria broader, so these are good for those who may have a low income or credit issues. But, again, there is a limit as to what you can borrow.

Loans through CalVet

Home improvement loans are available to active CalVet Contract holders and veterans who do not have a current CalVet Home loan and can transfer title of their property to CalVet in a 1st lien position, in order to enter into a new Land Sales Contract, according to the California Department of Veterans Affairs. Mobile homes may also qualify for CalVet loans when adding health and safety items. As with other government-backed loans, you won’t be able to build items that are meant for recreation or entertainment, like a pool or tennis courts.