As the name implies, home improvement loans are special loans that banks and other lenders extend to homeowners for the purposes of making improvements on a home. Improvements that are allowed can fall into any number of categories, including indoor and outdoor improvements.
In general, banks who extend these types of loans to customers would like the home improvements to be something that will increase – or at least maintain – the value of the home so as to preserve the home equity.
Borrowers can generally take out this type of loan from their current mortgage lender, or they can shop around to other lenders. The homeowner has no particular obligation to go with their existing mortgage lender when it comes to borrowing money in the form of this type of loan.
Of course, if you are looking to borrow money to make improvements to your house, you will want to shop around to try to qualify for the lowest-possible rate; shaving just 1-2% off of your loan interest rate could save you thousands of dollars in interest payments.
If you are looking for the best home improvement loan rate, here are the answers to 5 frequently-asked-questions (FAQs) about home improvement loans:
1. Do home improvement loans require that I put up collateral?
A: Many home improvement lenders require that you put up collateral, usually in the form of home equity. They may extend to you, for example, a 75% LTV (loan-to-value) loan. This simply means that the total amount borrowed plus existing mortgage balance together must equal less than 75% of the home’s appraised value.
However, some lenders do offer this type of loan without requiring that the borrower put up any collateral. It is important to shop around until you find a lender that is willing to agree to your desired loan terms.
2. Is there a minimum or maximum loan amount?
A: Most lenders will usually require a minimum loan amount of, for example, $5,000. And, there will be a maximum loan allowed, as well. For those lenders who require collateral in the form of home equity, the maximum can be easily calculated based upon the type of loan (e.g., 70% LTV, 75% LTV, etc.).
3. How do interest rates compare to credit card interest rates?
A: In almost all cases, interest rates for this type of loan are going to be lower than if you borrowed the same amount against a credit card.
4. How do I access the money?
A: You may be paid the money you borrowed in a single, lump sum. In other cases, you may be able to set up the loan payments to where you simply withdraw the amount you need, much as you would when using a credit card or writing checks.
5. Are these short-term or long-term loans?
A: In general, the best home improvement loans are relatively short-term loans. This is especially true if you decide to borrow the money on a borrow-as-you-go basis. However, if you choose to get a lump-sum type of loan, your repayment terms may be longer term, such as 5 or 10 years.
Consider these answers to 5 FAQs about home improvement loans in order to help you secure the best rates.