There’s a reason why there are currently 21.1 million outstanding home renovation loans in the United States.
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These types of loans play a vital role in allowing people with homes or mortgages to finance their needed or wanted home improvement projects.
While a home renovation loan can be a great way to pay for these changes, the reality is that it isn’t always for everyone. Indeed, if you aren’t careful, then you can lose a lot of money with this type of loan.
In some cases, it can even plunge you into serious debt. So, how do you avoid this problem? Simple: by reading this article! In it, we’ll walk you through five things you should always consider before taking out a home renovation loan. That way, you know for sure whether or not it’s right for you. Let’s get started!
1. Do You Need a Home Renovation?
Before you commit to a home renovation loan it’s important to think about whether or not you need whatever it is you’re funding. Some renovations, like repairs on critical systems around your house, are essential for day-to-day living.
As such, these types of projects should be prioritized. However, most of the most common reasons for these types of loans are home improvements that increase property value.
But, improved real estate value isn’t always a great reason to take out a loan. As such, it’s important to ask yourself whether or not a project that’s going to cost thousands of dollars is worth it.
You can do this by thinking about the period where you won’t see any value coming from the home renovations. Most of the time, these renovations will bring in a higher return on investment. But, this usually comes after months or even years of making consistent monthly payments. As such, it’s a decision that no one should take lightly.
2. What Type of Loan Should You Choose?
Generally speaking, there are three types of loans you can choose when completing a home renovation. This includes personal loans, home equity loans, and home equity lines of credit.
Personal loans are unsecured loans which means you don’t risk losing collateral like your house if you can’t make payments. However, because of this, they tend to come with higher interest rates.
Home equity loans use any equity you have on your house to secure the loans. While they come with lower interest rates you also risk losing your home if you can’t make payments.
Finally, home equity lines of credit work in a similar way to home equity loans. The main difference is that you can use the funds on an as-needed basis for whatever you want, be it a home renovation project or bills.
3. How Much Can You Realistically Borrow For a Home Renovation Loan?
Before you begin researching home loans you must get an estimate on how much the home revocation project will likely cost. It’s also important to anticipate unexpected expenses.
So, you should always add around 30% to the estimates. From there you can decide how much you can realistically borrow. This depends on a variety of factors like your credit score, income, and the amount of value that the loan is bringing in.
A home renovation loan lender will typically look at the percentage of the market value on your home before they decide how much to give you. It’s also important to remember that just because you have a high income doesn’t mean that you will get a larger loan. If more than 35% of your income goes towards debts, then you might find it difficult to secure a loan.
4. Pay Attention to Your Interest Rate and APR
Interest is the way that loan companies make a profit off their loans. It refers to an additional amount of money you pay in the form of a percentage of the money you were loaned.
Your loan rate is determined by a variety of factors like your credit score, market conditions, loan-to-value ratio, income, and credit score. When shopping for an interest rate it’s important to go with the lowest one you can find.
However, you should also pay attention to whether it’s a fixed interest rate or an adjustable-rate. Fixed rates mean that you will pay the same interest throughout the life of the loan.
Adjustable rates, on the other hand, can increase or decrease throughout the life of the loan. You should also look closely at your APR. This stands for the annual percentage rate. It includes your interest rate, but also hidden fees like your closing costs and origination fees.
5. Know Which Types of Projects Add the Most Value to Your Home
If your goal is to add real estate value to your home, then it’s important to know what types of projects add the most value to your property. Turning your attic into a bedroom is always a good call because it adds an entire room to your property.
Remodeling your kitchen or bathroom also brings a high return on investment. As such, it’s hard to go wrong with these types of home renovations. Door replacements are also a good investment. Since these are the first things people see from your home they can make a big difference in terms of curb appeal.
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We hope this article helped you learn whether or not you should apply for a home renovation loan. At the end of the day, this type of loan is a helpful way to deal with repairs or renovations that you can’t afford to pay for in one lump sum.
However, it’s still important to consider all of the things listed in this article. That way, you know that you’re getting favorable terms with your loan that you can afford to pay off over time.
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