Home Improvement Loans FAQ | Home Guides

Many homeowners have a great deal of money invested in their homes after years of paying down a mortgage and building up equity. It may seem like a step backward to borrow more money to pay for home improvements, but taking out a home improvement loan can be a good financial decision. Renovating your home can result in a better, safer place to live, or yield a higher sale price when you sell it in the future.

When Should I Borrow?

Because a home improvement loan will carry interest rates that reflect economic conditions, the best time to borrow is when interest rates are low. Home improvement loan interest rates are tied to the federal reserve rate as are standard mortgage rates, so the best time to buy a home is also the best time to borrow to improve an existing one.

For the individual homeowner, the best time to borrow money for needed home improvements may be when the house is in disrepair and selling it is not an appealing option. Improvements will prepare the home for sale in the future and are usually less of a financial commitment than buying a new home.

How Should I Use Home Improvement Funds?

Home improvement loans may come with stipulations about how the money is to be spent. However, homeowners still have a great deal of say in what they use the funds for. Making structural improvements to secure the home and guarantee its long-term stability is always a good place to start. Removing health hazards, such as lead-based paint, and installing new energy-efficient appliances, fixtures and windows are important steps. Make major needed repairs like installing a new roof or siding, or replacing worn flooring.

Will Home Improvement Pay Off?

There’s no guarantee that home improvements will pay off and earn the typical homeowner more than the cost of his loan. It depends largely on the housing market, which can cause home values to fluctuate widely. However, in the long term, home improvement loans have a net positive effect by increasing the value of a home and also attracting more buyers for a quicker sale. Making improvements that are badly needed prevents a home from sitting on the market for an extended period of time, which saves on maintenance, real estate agent fees and marketing costs.

What Types of Loans are Available?

Lenders offer homeowners several options for home improvement loans. First-time home buyers may be eligible for a government-backed loan through the federal Department of Housing and Urban Development. These HUD loans are only available to homeowners who intend to occupy the property and not use it as a short-term investment. HUD loans also place limitations on how the homeowner can spend the money, though the loans cover all of the most common types of improvements including landscaping and aesthetic improvements.

For other homeowners, a home equity loan or line of credit may be the best option for funding improvements. A home equity loan is a lump sum payment borrowed against the equity in the home, while a line of credit remains open for continual charges as needed. Both types of home equity borrowing are subject to lender fees and variable interest rates, so borrowers must educate themselves before selecting a home improvement loan.

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