Eventually, every house is going to need to be renovated and updated. Adhering to the Second Law of Thermodynamics, all things – including your home – deteriorate over time. What you need to know is when, the work that needs to be done, and how much will it cost. The problem is we don’t always have the answer to those questions, and home improvements can be both unexpected and costly.
If you don’t have the savings to tackle a major home improvement project but need to get it done, then it’s time to look into a home improvement loan. There are two major types of loans – mortgages and credit lines, and both have their benefits and drawbacks. Keep reading for information on these two types of loans as well as tips on when to apply for approval.
First, there’s the mortgage. Depending on the loan provider, mortgages will vary in terms or interest rates and repayment schedules. Ideally, if your credit is good and your first mortgage is paid off, you should be in a healthy position to secure a quality mortgage or home equity loan with a low interest rate.
There are two types of mortgages. The first is a fixed mortgage. This means that the interest rate doesn’t change and you can expect your monthly payment to remain the same month-after-month, year-after-year until the loan has been paid off. The second type of mortgage is an adjustable rate mortgage (ARM); this means that the interest rate will vary and your payments will start small, but most likely grow over time. So, if you’re planning to stay in the home for more than a few years, you’ll most likely want a fixed rate mortgage.
If your first mortgage isn’t paid off, you can apply for a home equity loan. A home equity loan is based on the estimated value of your house after the renovations and after you subtract what you currently owe on your first mortgage. For example, if the value of your home is $ 125,000 and you have $ 75,000 left to pay on your mortgage, you could theoretically borrow up to $ 50,000 on a home equity loan.
Next, there is the line of credit. A line of credit is great for smaller projects and typically offers fantastic interest rates. The other benefit of a line of credit is that you only owe interest on what you’ve borrowed or taken out from the line of credit.
When you set out to apply for a line of credit, home equity loan or second mortgage, try your own bank first. That said, you should always shop around for the best rate and terms and not be afraid to let your bank know that a competitor has offered a better rate – they’ll often meet it.
Remember, home improvement is an investment, so calculate the cost of the project plus the cost of borrowing versus the increased value the project will add to your home. With a good interest rate and an easy loan to pay back, you should see a profit.