Homeowners planning a remodel or home improvement project have many decisions to make throughout the process, including how they should finance their project. We talked with Liberty Bank Minnesota on financing options for home improvement projects.
Important Things to Consider
When homeowners are looking into their financing options, there are two important aspects.
1. Type of Project
The cost, size and complexity of the project will help determine the best financing option.
2. Experience of Lender
Find a lender you trust and that specializes in financing residential real estate as they will have many financing options to fit your needs and guide you throughout the process.
Home Improvement Financing Options
Unsecured Personal Loan or Line of Credit
Unsecured loans and personal lines of credit are loans that are made based on your past credit history. There is not any collateral taken. This type of loan is generally made for a shorter period of time (2-5 years) and usually has a set monthly payment. Personal unsecured loans and personal lines of credit often offer a simple application process and quick turnaround time. Home improvement projects with an investment amount of $10,000 or less are best suited for this type of financing option.
Home Equity Loan or Home Equity Line of Credit
Home equity loans and home equity lines of credit are often referred to as second mortgages as most borrowers already have a first mortgage. This type of financing has more flexible payments and generally the repayment is calculated over a longer period of time. Therefore, these types of loans are suitable for larger projects, where the home improvement investment amount may be more challenging to pay off in 2-5 years. To understand how much you can borrow, most lenders will use a loan to value calculation. For example if you are working with a lender that allows second mortgages up to 90.00% of your home’s value and your home has a value of $250,000.00 and you owe $180,000.00 on your first mortgage, your lender will take 90% of $250,000 which is $225,000, less your first mortgage balance of $180,000, leaves you with $45,000 available to borrow on a home equity loan.
For large home improvement, remodel and addition projects, homeowners may want to consider refinancing your first mortgage and then add the new funds needed to that loan. This type of loan is usually limited to an 80.00% loan to value ratio. Generally, first mortgages have the lowest interest rates for the longest period of time.
Value – Added Loan
If you don’t have enough equity in your home to borrow the money you would like, ask your lender if they have a financing option that will take the anticipated improvements into consideration in the value of your home. With this type of loan, the lender will base the equity on your home using the anticipated improvements. Typically, the lender will disburse loan funds as the project is being completed.
For all financing, it is important to make sure you understand your options and ask about fees, interest rates, fixed or variable, term of loan, etc.
Thank you Liberty Bank Minnesota for all the great information on financing options for home improvement projects.