There are several types of loans that can be used for house remodeling. Many homeowners take out a home equity loan or home equity line of credit (HELOC) for that purpose. The home is collateral for the loan. Because of this, rates are typically lower. One could even use credit cards for home improvements, but the cost likely would be prohibitive. Each loan has advantages and disadvantages.
Whether you hire a contractor or take on the work yourself, begin with an accurate estimate of what the project will cost. Lenders will insist on a specific figure before they work with you. If you're hiring a contractor, start with a firm bid, broken down into labor and materials. Then add on 10 percent for surprises. On work you'll do yourself, compile a detailed materials list with quantities, costs, and an accurate total. Include permit fees and equipment rental. Then add a cushion of 20 to 30 percent to be safe. Once you know how much you need to finance your home improvement project, how much will you get? Despite the promises and hype lenders make in their ads and promotional materials, how much you can borrow hinges on your credit rating, the loan-to-value ratio, and your income. These factors also help determine the interest rate, the length of the loan, and whether you'll pay points. Your credit rating. The best rates and terms go to homeowners with an A rating—no late payments in the last 12 months and no maxed-out credit cards. One or two late payments or overdrawn credit cards probably won't knock you out of the game, but you might end up with a higher interest rate and a smaller loan.
If you have planned a renovation with a mock budget and know what the end total looks like, a good first step is to evaluate whether it's feasible to fund with cash. Creating this budget will not only help you pinpoint your expenses, but if you end up going with a loan, it will be an integral step in showing lenders that you’re prepared for the renovations.
Interest rates. The less interest you pay, the more loan you can afford. An adjustable-rate mortgage (ARM) is one way to lower that rate, at least temporarily. Because lenders aren't locked into a fixed rate for 30 years, ARMs start off with much lower rates. But the rates can change every 6, 12, or 24 months thereafter. Most have yearly caps on increases and a ceiling on how high the rate climbs. But if rates climb quickly, so will your payments.
Homeowners looking for ways to pay for a home improvement have a lot of choices. Taking out a home equity loan, doing a cash-out refi or getting a personal loan are just some of the possibilities depending on your personal financial situation. With NerdWallet’s financing calculator, we help you identify the financing choice that saves you the most money.
State and Local Loan Programs. In addition to loan programs run by the federal government, there are thousands of programs operated by the 50 states, as well as counties and municipalities. For example, the state of Connecticut currently lists 11 programs that assist homeowners with everything from financing the purchase of a home in need of repair to helping improve the energy efficiency of their houses.
As with other lenders, your interest rate will be based on your credit score, how much you want to borrow and your repayment period. Because these loans have relatively short repayment periods of three to five years, you’ll get out of debt quickly and won’t be paying interest for years. And you may be able to get a peer-to-peer loan even though you have less-than-stellar credit, though you can expect to pay a high interest rate if you’re approved.
Loan shopping often starts with mainstream mortgages from banks, credit unions, and brokers. Like all mortgages, they use your home as collateral and the interest on them is deductible. Unlike some, however, these loans are insured by the Federal Housing Administration (FHA) or Veterans Administration (VA), or bought from your lender by Fannie Mae and Freddie Mac, two corporations set up by Congress for that purpose. Referred to as A loans from A lenders, they have the lowest interest. The catch: You need A credit to get them. Because you probably have a mortgage on your home, any home improvement mortgage really is a second mortgage. That might sound ominous, but a second mortgage probably costs less than refinancing if the rate on your existing one is low. Find out by averaging the rates for the first and second mortgages. If the result is lower than current rates, a second mortgage is cheaper. When should you refinance? If your home has appreciated considerably and you can refinance with a lower-interest, 15-year loan. Or, if the rate available on a refinance is less than the average of your first mortgage and a second one. If you're not refinancing, consider these loan types:
A home improvement loan calculator can help you budget your project and determine potential loan payments. If you are thinking of updating your home, you may be interested to know that there are home improvement loan calculators online to help a homeowner determine what the payments will roughly be for a particular amount taken out. With a home improvement loan calculator, a potential homeowner who is interested in updating their home will be able to see how much home improvement loan rates will be based on the interest. These home improvement loan calculators are very easy to use. They will help to figure out an approximate cost based on the home improvement loan rates that are offered by the lender. Simply enter the loan amount, the time frame, interest rate, and the first due date, click submit and the online calculator will do the rest of the work for you. These calculators make it quite nice to compare how much you can save when you accelerate your payments and pay the loan down faster than the original schedule. Using this calculator is a smart option for homeowners who wish to see what options they really have, and to see what they can truly afford.
If you have very good to excellent credit, you can probably get approved for a new credit card that will charge you no interest on new purchases for nine to 18 months. Cards that have such an offer as of Dec. 5, 2016, include Chase Slate (0% APR for 15 months, no annual fee) and Capital One QuicksilverOne (0% APR for 9 months, $39 annual fee). Many other offers are available from both credit unions and banks.
1 Your loan terms, including APR, may differ based on loan purpose, amount, term length, and your credit profile. Rate is quoted with AutoPay discount. AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice.
Before applying, be sure to check your credit history for inaccuracies, and if you find any, dispute them. You’ll want to make sure your credit is in tip top shape so you can get the best rate from lenders. If your credit score is subprime, consider a bad credit loan instead. It’s also important to get a few estimates prior to applying for a loan so you have an idea of how much money you need to get the job done.
For financing the loan the home is used as equity. Usually, value of a home increases on the completion of the home improvements. This can actually be profitable. With proper repayment of the home improvement loan it is profitable. Real estate values are always on the rise. Before the home improvement loan is acquired it is absolutely necessary not to tamper the existing house in any way. A long-term plan is advisable.
You could also do a combination of cash and one of the financing options below to reduce the amount you pay in interest. Also note that by "cash" we mean you pay for the project outright rather than get a loan for it that you pay off slowly. That could mean charging the project to your credit card so you get the rewards for it but then paying your credit card in full when it's due, avoiding the interest.
It's been a few years since I painted anything in anger, but back when I did, there was a trick I'd use when protecting carpet. Round the edge of the carpet, right up against the baseboard, I'd run a 1 1/2 or 2 painter's tape, and let the tape stick slightly to the board. Then I'd go round with the broadest taping knife I had, and tuck the tape down hard. That left the carpet edge protected and rounded over and the tape was now creating a line along the baseboard *below* the level of the carpet. Then I'd sheet up as usual.That made it super easy to paint the baseboard, the bottom edge didn't need cutting in! Just work the pain in there! If the bottom edge was a little messy and uneven, who cared? Once the paint was thoroughly dry, the tape was lifted (carefully, to not pull the carpet off the gripper) and the carpet would bounce up and hide the bottom edge of the paint. A perfect look, quicker and safer than trying to cut in along a fuzzy carpet edge.
Specialized lenders. Some finance companies focus on particular types of home improvement projects, and it may make sense to use those sources. For example, loans for energy-efficient upgrades might be available through local Property Assessed Clean Energy (PACE) programs, or your contractor may have funding options available. Remember to compare these loans to alternatives—just because they're specialized doesn't mean they have the best rates.
That low interest rate has a price, however. There might be hefty closing costs and more application hoops to jump through because these loans, like applying for a mortgage, put your property up for collateral. You'll also need to have enough equity in your home to qualify. For example, if your home is appraised at $200,000 and your mortgage is currently $150,000, you have $50,000 in equity that could be tapped. To reduce risk, lenders usually limit the amount of loans you can have on your home to about 85 percent of your home's value. So in this example, 85% of $200,000 is $170,000; after subtracting the current mortgage amount of $150,000, you're left with $20,000 you could qualify for.
Homeowners with limited equity can get an FHA Title I loan for improvements that make a home more livable and useful, including accessibility improvements and energy conservation improvements. These loans can’t be used for luxury items such as swimming pools or outdoor fireplaces, however. Loans for less than $7,500 are usually unsecured; the most a homeowner can borrow is $25,000 for 20 years to improve a single-family home. The lender determines the interest rate. You’ll need to find an FHA-approved Title I lender to get this type of loan. As with any loan, you’ll need good credit and a demonstrated ability to repay the loan.
The interest rate will also depend on the borrower’s credit score, the loan term and the amount borrowed. For example, SunTrust Bank offers home improvement loans for $5,000 to $9,999 with terms of 24 to 36 months and interest rates of 6.79% to 12.79% (rates include an autopay discount of 0.50%), while a loan of $50,000 to $100,000 for the same amount of time comes with an interest rate of 4.79% to 10.29%.
The catch is that to keep the 0% rate, you will likely be required to make minimum monthly payments on time every month, even during the 0% introductory period. You need a clear plan for repaying the full amount you borrow before the introductory period ends, or else you will have to pay interest on the remaining balance, usually at a much higher rate.