What Is A Home Improvement Loan?

Homeowners may apply for home improvements loans for many reasons. These include remodeling, updating, or repairs. Home improvement loans can be granted for everything from a roof repair to an upgrade to an energy-efficient furnace or even a new addition. This type of loan repayment can be made in many ways. For example, an unsecured loan can be taken by a homeowner or the home's equity used as collateral. A homeowner can also apply for a first mortgage loan and a subordinate loan. Each situation is different and requires careful consideration of which type of financing may be most appropriate.

If You Have Little Or No Equity In Your Home

• You only have one option for minor repairs and/or updates:

  An unsecured loan is your only option. The property's value would not raise enough to allow a lender to use it as collateral. Unsecured loans will have higher interest rates than those secured by the property. However, the loan will not include the higher closing cost that is associated with mortgage loans.

• There are a few options for major repairs, renovations, or remodeling:

  You might consider a second mortgage to keep your current low-interest rate if your first mortgage rate is too low. To take advantage of lower rates, refinance with a renovation loan or "as restored" value cash-out refinance if your current mortgage rate exceeds the market rate. To base the property appraisal on "after-improved" value, the lender will need to see the detailed repair and remodel plans. These loans will be subject to higher closing costs and have lower interest rates than unsecured loans. Because lenders have a maximum loan-to-value limit, your options will depend on the "improved valuation" results.

If You Have A Large Amount Of Equity In Your Home

• Minor repairs and updates:

  It is unlikely that the loan amount will be large enough to warrant an unsecured loan. It's best to get a loan with low closing costs if the loan amount is not large. Unsecured loans have a higher interest than the home equity loan of credit (HELOC) and can be repaid if necessary.

• Major repairs, renovations, or remodeling:

  If the equity in your home is sufficient, the lender may be willing to lend you the cash in one of several ways. A HELOC, an installment second mortgage, or a cash-out refinance would all be available to you. The best product for you depends on your financial situation and desired outcome. You can choose to keep your current interest rate by choosing the HELOC or second mortgage installment loans. These options have significantly lower closing costs, but they will charge you higher interest rates for junior liens. You may choose to cash-out refinance if you are looking for cash flow and/or a lower interest rate on your first mortgage.

Every person's financial situation is unique. Talk to a loan officer to find the best option for you.