Loans used to finance improvements on your house, or property, are normally considered home improvement loans. Typically the funds from the loan are used to maintain or increase the value of the property. This may include doing necessary repairs, renovating the kitchen, adding a new bathroom, adding on or many other general property improvements. Outdoor improvements can also be considered home improvements in most cases. There are several different improvement loans and financing types available.
Types of home improvement loans
First mortgage loans – You may already have a first mortgage from when you originally purchased your home. Your current lender may also offer home improvement loans as an additional loan or as an extension of the existing mortgage. You will have to discuss the terms in detail with your lender, but be sure and get other quotes and make a detailed comparison of your available options.
If you are just purchasing a property, that needs some attention, you may also be able to include money to make improvements with the purchase loan (such as an FHA 203k Loan) Money for the improvements is usually paid out in payments that are proportionate to the work that has been completed and the contractor may be paid directly by the lender. In other cases the borrower may receive the money upon proving the payments to the contractor.
Second Mortgage Loans
You may have equity in your home that you can tap into, but you should evaluate and compare your options in detail. A second mortgage will usually have a higher interest rate and often a shorter payoff period.
By refinancing your first mortgage you may be able to lower your payments, defer a payment or two or release some cash for home improvements. In most cases you will be starting the loan term all over again so make sure you consider the total cost when comparing a new loan to the existing one and when evaluating the total cost of potential improvements.
A personal loan does not require that you to have equity in your home, nor does it require that you use the home as security for the loan. It is a loan provided by either a finance company or a bank. If you do default however, and the lender secures a judgment against you, they may be able to record the judgment as a lean against your property.
Home Improvement Grants
There are many government grant programs available that offer financial assistance to low income families to repair their current homes. The Department of Housing and Urban Development’s mission includes expanding home ownership opportunities and fostering neighborhood revitalization. They have established programs to rehabilitate properties in partnership with state housing agencies and non profit organizations. Check with State and County agencies for more information.
Some government agencies also provide grants or tax benefits for home improvements that save energy or make homes more efficient. These are usually administered at the State and County level. You can also learn more at www.energystar.gov.
Some fundamental questions to answer while making your evaluation of the different options include:
Are the improvements you plan to undertake increasing the value of your home more than the loan you apply for?
What will the monthly payments and total cost of the loan be?
Are there any tax implications? (i.e. an increase in property taxes.)
Are there possible tax deductions? (For energy efficient fixtures, etc.)
And remember, before considering your various loan options you should have a detailed plan of the improvements you intend to carry out including the estimated costs for the improvements. In many cases you may be required to present this information to the lender, therefore, you should also get estimates and quotes from contractors.