Home Improvement Loans
From LoveToKnow HomeImprovement
Home improvement loans are an excellent source of financing for any homeowner who is interested in making minor or major home improvements. Smaller loans can be obtained without collateral, and larger loans can be obtained by borrowing from your home's equity.
What is a Home Improvement Loan?
Home improvement loans are meant to be used specifically for financing home improvement projects. Projects can include anything from kitchen remodeling and other room remodeling projects to adding a new roof, windows or siding.
The amount of money you can borrow with a home improvement loan will depend on a lot of different things that can include, but are not limited to:
- Your credit rating
- Your debt-to-income ratio
- Your ability to afford monthly loan payments
- The value of your home
- The cost of your home improvement project
Interest rates and loan terms will vary depending on the type of home improvement loan you obtain. There are two basic home improvement loans: secured loans and unsecured loans.
Unsecured Home Improvement Loans
An unsecured home improvement loan is a loan that does not require any collateral. In most cases, when you take out an unsecured home improvement loan, you are required to use the majority of the money you borrow for home improvements. However, this is only a general rule of thumb. Different lenders have different classifications.
For example, one lender may classify your loan as a home improvement loan, while another will classify the loan simply as a personal loan, which can be used for any reason the borrower sees fit.
No matter how the loan is classified, the interest rate will generally be higher on an unsecured loan versus a loan that has been secured by collateral. The reason for this is because the lender will be assuming most of the risk. If you default on your payments, the lender has no property to claim so that it may recoup the investment in a timely manner. The borrower, therefore, is required to pay more interest as a way of balancing out this risk.
Secured Home Improvement Loans
Secured home improvement loans are loans that have been secured by some form of collateral. In most cases, the collateral is your house, which means that you are essentially borrowing from your equity.
There are two basic ways to do this. The first is through a home equity loan, and the second is through a home equity line of credit.
Home Equity Loans
Home equity loans are fixed rate loans that allow you to dip into the equity that has accumulated in your home and borrow a lump sum of money. The amount of money you can borrow is directly related to the value of your home and the amount of money that you currently owe.
For example, is your home is valued at $100,000 and you owe $80,000 on your home loan, you have $20,000 in equity.
Some lenders will allow you to borrow up to 80 percent of your home's value, while others will allow you to borrow as much as 125 percent. It should be noted however, that if you borrow more than 80 percent of the value, you may be required to pay for private mortgage insurance.
The interest rate you pay, as well as the length of the loan term will vary depending on the home equity loan lender you choose. You can usually find terms that last anywhere from one year to 30 years.
Home Equity Lines of Credit
A home equity line of credit works exactly like a home equity loan, but with one major difference. Instead of borrowing a lump sum of money, you are given a credit line that allows you to borrow up to a predetermined amount.
Home equity lines of credit usually have an adjustable rate, and can be very beneficial for borrowers who aren't sure exactly how much they need, or for those who want to borrow as little as possible.
Rates and terms also vary on home equity lines of credit, depending on the lender you are borrowing from.
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This page has been accessed 1,244 times. This page was last modified 01:54, 22 July 2008.
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