You’ve finally made the decision to freshen up your lackluster home. You have a plan in hand, you’ve received bids from contractors; you’ve done just about everything except find a way to pay for it. Home improvement financing is the last duck in your row before beginning your project.
Since you’re a homeowner you may be able to use the equity in your home to finance your home improvements. This is one of the best ways to finance your loan.
The equity in your home can be used in two ways:
- Home equity financing ─ your existing mortgage remains intact and you can borrow all or part of your home’s equity (the difference between the balance on your mortgage and the estimated market value of your home). But it’s important to pay attention to any points attached to your loan. A difference of 1 percentage point in your interest rate on a $25,000 loan will raise your minimum payments $250 per year.
- Mortgage financing ─ Assuming that interest rates are favorable, you can refinance your first mortgage with a larger mortgage that includes the value of your equity. This option is attractive because there is no second loan on which you must make payments. You would enjoy the advantage of one home loan and one monthly payment. Other benefits of this type of loan are:
- You can choose from fixed or variable interest rate loans ─ loans have fixed-rate interest and lines of credit have variable-rate interest.
- You can get cash and spread the payments out over a longer term ─ home equity financing can afford the flexibility of a shorter term loan to more quickly build equity.
- You may receive a lower interest rate with home equity financing ─ you only pay interest on the amount of money you actually use with a line of credit and you can access it whenever you want without having to reapply.
Another financing for home improvement option for home improvement loans is the Refinance and Renovate loan. This loan is a good option if you have little equity but want to refinance your home to make a significant improvement. Your current mortgage is refinanced for an overall higher amount using the value you’re adding through your improvement. Other forms of financing base the amount you can borrow on the value of your home in its unimproved state.
The Refinance and Renovate financing loan offers the following features:
- A larger sum of money for improvements ─ the amount you can borrow is based on the value of your home after the improvements have been made.
- You will pay lower monthly payments ─ your interest rate will typically be lower than what you would pay on your first mortgage combined with a home improvement loan.
- You can claim the interest from your home improvement on your income tax ─ mortgage interest is tax deductible.
- The process is simple ─ you will have only one application, one set of fees and closing costs, one closing and one payment each month.
The Refinance and Renovate loan is recommended for people who have little equity in their homes, want to make home improvements and require extra financing to accomplish it.
Typically, there are three sources for home improvement financing:
- Mortgage brokers front a number of finance sources including regional and national banks, insurance companies, specialized lenders and even wealthy individuals. The greatest strength of mortgage brokers is their diversity; they offer a wide range of options.
- Banks are a common source of capital for home improvement loans. You may have a good, strong personal relationship with your personal banker that makes your bank a good financing choice.
- Specialized lenders come in all flavors. These lenders generally specialize in one or two specific types of loans. Their strength lies in their knowledge about the financing options they work with; they have streamlined loan processing to offer very competitive rates.
The Title 1 Property Improvement Loan Program is designed for lower income or disabled homeowners. Banks and other qualified lenders loan money from their own funds and the FHA insures the lender against a default. Title 1 loans may be used for improvements that will make the home more livable and useful.
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