One of the ways that you can increase the value of your property and improve the livability of your home is to get a home improvement loan. Repairs on a home are often too expensive for people to pay out-of-pocket, so loan financing can be very helpful. A home improvement loan is based on the amount of equity you have in your home. If you have an adequate level of home equity, you may be able to finance repairs with a home improvement loan.
The steps below will take you through the process of obtaining a home improvement loan.
1. Determine how much equity you have in your home
You can calculate your home equity by subtracting the remaining balance on your (original) mortgage loan from the current market value of your home.
2. Decide on improvements/repairs
Make a list of what needs to be done on your home. You should also get price quotes from some contractors, as you will need information about the cost of repairs when you apply for a home improvement loan.
3. Check your credit report
Make sure that your credit report is accurate, and correct any mistakes. If necessary (and if you have the time), work on improving your credit score.
4. Gather documentation
A home improvement loan is basically a second mortgage. At application time, the lender will require good credit, identification, proof of your income, and information regarding the cost of your home improvements.
5. Shop around for rates and terms
Visit with at least 3 lenders to see what they offer for home improvement loans, and compare. Make sure you do business with a reputable institution and beware of predatory lending tactics. Choose the loan that works best for you.
6. Review the loan terms
Make sure that you fully understand the terms of your home improvement loan before signing ― including the term length, interest rate, lender fees, and any penalties. If you are satisfied with the loan agreement, sign the proper forms and begin your home improvements.
It is important to realize that a home improvement loan is secured by the equity in your home. If you default on your loan, you could lose your home to foreclosure. So before you borrow money to make home improvements, make certain that you can afford a second mortgage loan. Also be careful to only borrow what you need to make the home improvements (e.g., don’t borrow extra money to go a vacation while your house is under construction). You want to be able to pay off your debt quickly and avoid accumulating interest.