Home improvement loans could be any type of financing that you use to remodel your home. There is no particular type of loan called, "home improvement loan". It's more of an indication of what you will be doing with the funds.
Whether you're renovating a family room, remodeling a kitchen, building a granny flat, or installing a sunroom--you have many choices, when it comes to funding your project. Let's look at 5 types of home improvement loans.
Cash-out refinance
In a cash-out refinance, your existing mortgage is replaced by an additional loan for more than your existing mortgage claims. Rather than keeping the difference in your account, you receive it in cash, which you can use to improve your home. When you refinance your home using a cash-out mortgage, you must have equity in your home.
HELOC (home equity line of credit)
When you obtain a home equity line of credit, you are borrowing against your home equity, and your home equity is used as collateral for the loan. Also, when you repay an outstanding balance, you replenish your available credit as you would do with a credit card. Thus, you're able to utilize some or all of the money you're approved to borrow during a borrowing period, usually ten years. During this period, you pay only the interest. In the later payment period, you pay both interest and principal.
Home equity loan
While a HELOC is similar to an equity line of credit, a home equity loan is more like a home mortgage. After you borrow a specific amount, you pay it back over a fixed period of time. In contrast to HELOCs, this second mortgage lets you receive the funds in one lump sum, and you start repaying interest and principal right away. If you're applying for a home equity loan, knowing the project's cost is key; getting a quote as the lender is underwriting is a wise step.
Construction Loan
A home construction loan can be used to build or renovate a home. It is independent of your mortgage. In contrast, a home equity loan uses the equity in your home as security. You (or your contractor) draw down the loan amount in installments.
You will be assessed by a few factors. Among them is your ability to repay the loan. The amount is generally determined by your income, your outstanding debts, and your credit history. What lenders will ask for – as well as how they will qualify you – will vary.
Your credit score is very significant. Minimum credit scores for home improvement loans vary depending on their type. Generally, you should have a FICO score of at least 720. Your credit score will affect your interest rate.
If you are planning to apply for a home improvement loan. We have proven experience working with mortgage lenders and homeowners. In Raleigh and Cary, we've helped homeowners obtain financing to upgrade their homes. Rest assured we'll work with you to understand your needs. To learn more, contact us today.
