Home-equity lines of credit. These mortgages work kind of like credit cards: Lenders give you a ceiling to which you can borrow; then they charge interest on only the amount used. You can draw funds when you need them — a plus if your project spans many months. Some programs have a minimum withdrawal, while others have checkbook or credit-card access with no minimum. There are no closing costs. Interest rates are adjustable, with most tied to the prime rate. Most programs require repayment after 8 to 10 years. Banks, credit unions, brokerage houses, and finance companies all market these loans aggressively. Credit lines, fees, and interest rates vary widely, so shop carefully. Watch out for lenders that suck you in with a low initial rate, then jack it up. Find out how high the rate rises and how it's figured. And be sure to compare the total annual percentage rate (APR) and the closing costs separately. This differs from other mortgages, where costs, such as appraisal, origination, and title fees, are figured into a bottom-line APR for comparison.
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.
To determine the loan amount, lenders use the loan-to-value ratio (LTV), which is a percentage of the appraisal value of your home. The usual limit is 80 percent—or $100,000 for a $125,000 home (.805125,000). Lenders subtract the mortgage balance from that amount to arrive at the maximum you can borrow. Assuming your balance is $60,000, the largest loan that you can obtain is $40,000 ($100,000-$60,000=$40,000). If you have a good credit rating, a lender might base your loan on more than 80 percent of the LTV; if you don't, you might get only 65 to 70 percent. While many lenders go to 100 percent of the LTV, interest rates and fees soar at these higher ratios.
Home loans using home equity as collateral are the most common and offer the biggest loan amounts, according to Greg McBride, senior financial analyst for Bankrate.com. However, “Lenders are looking for homeowners to retain a 15% equity stake after the loan,” McBride said, so you’ll need a fairly large amount of equity in your home just to qualify.
A home equity loan is another way to tap your equity without refinancing. Instead of getting a line of credit, as you would with a HELOC, you’d receive a lump sum of money. A home equity loan could make sense if you don’t want to refinance your first mortgage — if it has a very low interest rate, for example. But the interest rate would probably be higher with a second mortgage like a home equity loan than with a cash-out refinance.
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.
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.
• Home equity line of credit (HELOC). This is a revolving line of credit, like a credit card. In the beginning, you're only responsible for paying interest monthly; in the later years, you need to begin to pay back principal. A benefit of this type of debt is that you don't have to take out all the money at once for a project; you can draw gradually, as needed. After that initial "draw period," the HELOC converts to a fixed loan, and you'll have to pay back the principal on a set schedule. 

A home equity/Line of credit, a closed end 2nd mortgage, an after-value loan or a host of other equity products are the options available for home improvement loans. What are the improvements to be made, the period it will take to complete and the amount of equity available are the important considerations to be made before going for a home improvement loan.

**Subject to credit approval. No down payment. Fixed APR of 7.99% for 90 months. Payment Example: Based on each $1,000 financed, 6 months of interest only payments in the amount of $6.66 followed by 84 amortized payments in the amount of $15.58. Payment Example: Based on $3,000 purchase, 6 months of interest only payments in the amount of $19.98 followed by 84 amortized payments in the amount of $46.74. See loan agreement or ask Associate for details. Not valid in Puerto Rico, USVI, and Guam. LICENSES: NMLS #1416362; CT SLC-1416362; NJ MT #1501607 C22
Home improvement loans are unsecured, meaning they’re approved based on the borrower’s credit history and income and do not require collateral. They are offered by online lenders, banks, or credit unions and work similarly to personal loans. Once approved, you’ll receive funding through direct deposit or paper check, and then be able to pay for your building supplies and contractors.
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