American homeowners do an average of 3.7 home improvement projects each year, with the average cost-per-project being about $2,800. Of course, some projects are significantly more expensive than others. For example, redoing your kitchen or bathroom can cost tens of thousands of dollars.
You’ll likely need upfront financial assistance when you take on a more costly project. This is where loans for home improvement come in. Continue reading below to learn six things you should know about home improvement loans.
1. There Are Several Types of Loans for Home Improvement
Home loans for improvement projects are any personal loans you take out for that specific purpose. With this in mind, there are several types of loans you could use for home improvement. A few of the most common options include:
- Home equity loans
- Home equity line of credit (HELOC)
- Cash-out refinancing
- FHA 203(k) rehab loan
- Personal loan
- Credit cards
Each type of home improvement loan type comes with its own set of pros and cons. So, you should be sure to look into each option available before making a choice.
For example, personal loans may be suitable for those with good credit but little equity built into their homes. But, a home equity loan may be best for large projects as long as you have enough equity in your home.
2. You Should Choose Your Loan Amount Carefully
More isn’t always better when it comes to an improvement loan. Remember, you’ll still have to pay that money back with interest. Your interest rates are determined by the type of loan and your credit score.
However, you don’t want to choose a loan amount that’s too small, either. If you do, you won’t have enough funding for the project you’re hoping to complete. Thankfully, you can determine your necessary loan amount reasonably easily.
If you’re doing your home improvement project, you should determine what supplies you need and how much. Then, figure out how much they cost and create a list for reference.
After adding up all the associated supply costs, round up slightly to account for any mishaps or unexpected expenses. For example, if your total project costs add up to $9,750, you should round up to $10,000 or $10,500.
If you’re using a contractor for your improvement project, they should provide you with a cost estimate. Once again, you’ll want to round up slightly for unexpected costs. So, if you receive an estimate that your bathroom remodel will cost $24,000, look for a loan that offers $25,000.
This way, you’ll be sure to get the funds you need, so you know you’re covered. But you aren’t choosing a loan option significantly higher than your total costs, so you won’t be paying it back longer than you need to.
3. You May Not Be Eligible For All Loan Types
Not everyone will qualify for all loan types. So, you may not be able to choose from all potential options. The kind you’re eligible for will depend on many things, like:
- Your credit score
- How much equity you’ve built in your home
- What loan options are available in your area
- Whether you have a credit card and what the loan limits are on it
- How much money you’re looking to borrow
One of the most critical factors is your credit score since that will determine your eligibility and interest rates. High interest rates can add significant money to your monthly payments and overall loan amount.
4. Your Credit Score Matters
If you don’t have good credit, you won’t likely have as many options available to you for a home improvement loan. In addition, the choices you do have are likely to come with higher interest rates. While getting approved for a loan always seems like a good thing, high interest rates can be detrimental to your finances.
High interest rates can inflate your estimated monthly payments significantly. Not only does this stretch your finances moving forward, but it can also double or triple how much you pay back.
If you have a low credit rating, you should probably wait and build your credit if possible. Responsible use of credit cards is one of the best ways to build your credit. Also, if you have any outstanding loans or debts, try paying them off before taking out another loan.
5. You Should Shop Around
Always shop around before taking out a home improvement loan. One loan provider may offer significantly better interest rates and payback terms than another.
Don’t be in a rush if you don’t have to, and take your time choosing the best loan option. Being patient and doing your research will pay off in the long term.
6. You Can Use These Loans For Most Home Improvement Projects
Recent studies show that over 80% of homeowners are planning to do an improvement or renovation project in the next year. For most loans, there isn’t any major restriction on what type of home improvement projects you can do with the loans.
Instead, it’s more about how much money you can be approved for. A few examples of home improvement projects you can use these loans for, so long as you’re approved for enough financing, including kitchen remodeling, bathroom remodeling, and floor renovations.
Do You Still Have Questions About Home Improvement Loans?
Home improvement loans can help you afford projects with higher upfront costs so that you can pay them off over time. Several types of these loans are available, so shopping around and seeing which is best for your situation is essential.
Do you still have questions about home improvement loans? Then, check out our informative blog for more information about this and related topics today.