Refinance and 1st Mortgage Loans

Best Home Improvement Loan Tips

Home Improvement Loan: Financing Improvements

As a rule, the thriftiest way to finance improvements is to pay cash. If you have to get a home improvement loan; then want to do it in the least expensive way. Today there are a number of good plans for financing home improvements on reasonable terms. What kind of home improvement loan is best for you depends primarily on the amount of money you need to borrow. Check online resources to compare interest rates, repayment options, fees and penalties from lending institutions before deciding on one of the following options:

1. Home Improvement Loan: Second mortgage.

   This is a loan against the equity in your home. It is, in essence, an additional mortgage. Typically, financial institutions will let you borrow up to 80 percent of the appraised value of your home, minus the balance on your original mortgage. For example, if your home is appraised at $100,000 and your current mortgage balance is $70,000, you may be able to borrow $10,000 by way of a second mortgage. You may also incur all the fees normally associated with a mortgage - closing costs, title insurance and processing fees. Talk to your tax advisor about whether the interest on a second mortgage may be tax-deductible.

2. Home Improvement Loan: Refinancing.

   This involves paying off your old loan and taking out a new mortgage on your home. To refinance, generally you’ll need to have equity in your home, a solid credit rating and a steady income. You’ll incur all the closing costs that go along with getting a new mortgage, so unless you’re doing extensive remodeling and can get a mortgage interest rate at least two points less than you’re currently paying, this type of loan may not be for you.

3. Home Improvement Loan: Home Equity Line of Credit.

   Like a second mortgage, a home equity loan lets you tap up to about 80 percent of the appraised value of your home, minus your current mortgage balance. Since it’s set up as a line of credit, you won’t be charged interest until you make a withdrawal, but you will have to pay closing costs. You can make withdrawals gradually as you start paying contractors and suppliers. The interest rate charged is usually variable and may be based on the outstanding balance. Make sure you understand the terms of the loan. If, for example, your loan stipulates that you need to pay interest only for the life of the loan, you’ll have to pay back the full amount borrowed at the end of the loan period or you could lose your home. The interest on home equity loans may be deductible; talk to your tax advisor.

4. Home Improvement Loan: Unsecured Loan.

   Although the interest rates charged are often higher and you generally will not be able to get a tax deduction for the interest paid, the costs of obtaining an unsecured loan are usually lower. The relative ease of obtaining this type of loan makes it popular for small projects costing $10,000 or less. The lender will evaluate your application based on credit history and income.