Skip to main content

Financing Home Improvements



Home improvement loans provide a source of funds for owners to finance the improvements they want to make.  These are usually, personal installment loans that are not collateralized by the home itself.  Since there is more risk for the lender with this type of loan, the interest rate is higher than a normal mortgage loan.

In today's market, the rates on home improvement loans could vary between 6% and 36%.  A borrower's credit score will determine the interest rate; the lower the score, the higher the rate and the higher the score, the lower the rate.

Smaller loan amounts are under $40,000 with larger loan amounts over $40,000 based on the extent of the improvements to be made.  With all things being equal, a larger loan may have a lower interest rate.

Besides the interest rate being higher than a regular mortgage, the term is shorter.  Similar to a car loan, the term can be between five and seven years.  A $50,000 home improvement loan for a borrower, with good but not great credit, could have a 12% interest rate for seven years.  That would make the monthly payment $882.64.

An alternative way to fund the improvements would be to do a cash out refinance.  These types of loans are collateralized by the home.  The current mortgage would be paid off with the new mortgage plus the amount for the improvements.  Lenders will usually require that the owner maintain a minimum of 20% equity in the home.

Assuming a homeowner owed $230,000 on the existing mortgage and wanted $50,000 for improvements.  The new loan amount would be $280,000 and the home would have to appraise for at least $350,000 for the homeowner to have a 20% equity remaining. 

Another thing that occurs on a refinance is that the standard term for mortgages is 30 years which means the owner would be financing the improvements for 30 years instead of a shorter term.  The advantage would be a smaller payment.

Let's say in this example, the owner originally borrowed $250,000 at 4.5% for 30 years with a payment of $1,266.71.  After 54 payments, the unpaid balance is $230,335.  If they did a cash out refinance at 4.5% for 30 years for the additional $50,000 and financed the estimated closing costs of $8,700, the new payment would be $1,464.50.

Using the home improvement loan, the combined payments would be $2,149.35 which would be $684.85 higher.  While the cash out refinance produces a lower payment, it adds $8,700 to the amount owed and stretches it out over a longer period.  Home improvement loans have lower closing costs than regular mortgage loans.

Another alternative loan is a HELOC or Home Equity Line of Credit which can be explored and compared to the two options mentioned above.  If a homeowner is going to finance improvements, a comparison of different types of loans and payments can be helpful in the decision-making process. 

A trusted mortgage professional is a valuable resource to assist you with current and accurate information.  If you need a recommendation, please call me at (315) 761-5058.

Comments

Post a Comment

Popular posts from this blog

Make Your Home Offer the Most Appealing

Sales in February 2023 were up 14.5% month over month and still down 22.6% year over year according to the NAR Housing Snapshot.   The median sales price dipped 0.2% to $363,000 and there are 2.6 months supply of homes on the market compared to 1.7 months a year ago. "Inventory levels are still at historic lows, and consequently, multiple offers are returning on a good number of properties." According to Lawrence Yun, Chief Economist for the National Association of REALTORS�. It is still important to have a strategy for potentially competing with other buyers on the house you want to buy.   The plan should include several available provisions and options, so that at the time of drafting the sales offer, you can consider exactly what to include based on the situation. Unless a person is paying cash, you need to be pre-approved by a trusted mortgage professional long before you start looking at homes.   Include the written pre-approval letter along ...
Post a Comment
Read more

Cash-Out Refinance

With the rapid appreciation that homes have had in the last two years, most homeowners have equity.   A common way to release part of the equity is to cash-out refinance but some homeowners may not be eligible currently. This type of loan replaces the current mortgage by paying it off and an additional amount of cash for the owner.   Generally, lenders will consider a new mortgage up to a total of 80% of the current value. Typically, the rate on a cash-out refinance will be slightly higher than a traditional purchase money mortgage.   As is in any lending situation, the rate depends on the borrower's credit and income.   The best interest rates are available to borrowers with higher credit scores, usually over 740. Loan-to-value can affect the rate a borrower pays also.   A 70% loan-to-value mortgage could be expected to have a lower interest rate than an 80% LTV because there is a larger amount of equity remaining in the property and therefore, less risk ...
Post a Comment
Read more

Before You Leave Town...

Along with all the planning of what you're going to do and where you're going to stay, consider this checklist to make you feel more comfortable while you're away from home. Ask a trusted friend to pick up your mail, newspaper and keep yard picked up to avoid an appearance of not being at home. Stop your mail ( USPS Hold Mail Service ) and your newspaper. Don't post about your trip on Facebook and other social media until you return; some burglars look for this type of announcement to schedule their activities. Do notify police or neighborhood watch - especially if you're going to be gone for more than just a few days. Let your monitoring service know when you'll be gone and if someone will be checking on your home for you. Light timers make it look like someone is home. Set multiple timers for various times to better simulate someone at home. There are plug-in modules for lights and appliances that would allow you to control...
2 comments
Read more