Cover Those Bases With Home Improvement Loans and the Right Insurance
By Marsha Canright
Changing your home's décor can give it a fresh feel for summer. However, if your to-do list is more extensive than adding a few throw pillows, it may be time to consider applying for a home improvement loan. Here are valuable tips to consider before signing on the dotted line.
GET YOUR DUCKS IN A ROW
Start by estimating the total cost of your home improvement project. This is a critical step before applying for a loan. Ask for estimates from three to five contractors to be certain you are getting a reasonable price. Be sure to give the final number a little cushion — about ten percent extra — as unexpected costs sometimes arise during a renovation.
Also, get acquainted with your credit history, which is a substantial part of whether or not you receive a loan. In the United States, you are allowed one free credit report each year; access it at annualcreditreport.com.
CONSIDER YOUR OPTIONS
It's important to know the different types of loans that are available for home renovations. Generally, there are two categories of home improvement loans — those that use the equity in your home and those that require a down payment.
HOME EQUITY LOAN / LINE OF CREDIT
Home equity loans offer higher loan amounts as a lump sum. Most of the time lenders are looking for homeowners to retain a 15 percent equity stake after the loan, so you’ll need considerable equity in your home to qualify. A home equity line of credit (HELOC) provides a source of funds that is available as needed. Unlike home equity loans, which are fixed rate loans, a HELOC will have an adjustable rate of interest.
If you plan on using your home’s equity to secure a loan, you will probably be required to get an appraisal. This will determine the amount of equity you have accrued; critical information that the lender needs for processing the loan.
DOWN PAYMENT LOANS
If you don't want to use the equity in your home, there are also down payment loans, which are ideal for projects costing up to $50,000. These types of loans may come in smaller amounts with higher interest rates, short repayment terms and a balloon payment.
The Federal Housing Administration’s solution to this issue is the FHA 203(k) loan program. These loans are designed to benefit both borrowers and lenders; FHA insures these loans, both fixed and adjustable, and will cover the acquisition and rehabilitation of a property.
Homeowners can put down as little as 3.5 percent and pay it off in either 15 or 30 years. These types of loans can be used to redo a kitchen or bathroom, finish an attic or basement, change out the floors, buy new appliances or build an addition. They can even be used to rebuild a tear-down as long as the original foundation remains. What the money can't be used for are so-called luxury items like a swimming pool or a fire pit.
GO COMPARISON SHOPPING
It’s important to shop around before you apply for a loan. To be on the safe side, stay away from loans that put you in debt greater than 80 percent of the market value of your home. Look for the lowest interest rate, but also be sure to know the annual percentage rate (APR). The APR makes it easier to compare lenders and loan options.
SAVE, SAVE, SAVE
While it would be ideal to pay for the cost of home updates without having to get a loan, this scenario isn't always realistic for everyday homeowners. Still, it’s prudent to save money for renovations and use cash on top of a home improvement loan. Before you apply for any loans, determine whether you will be able to pay for any part of the project with cash. This will lower the amount you need from a lender, reducing the total interest.
PROTECT YOUR INVESTMENT
Lastly be sure you have protection for your home, which is most likely your largest asset. Even if you’re not in the 100-year or 500-year floodplain, the events of recent years indicate that flood insurance might still be warranted. Make sure your coverage is up to date, review your current coverage and consult with your insurance agent before embarking on a remodeling project. When selecting a contractor, check their license and proof of insurance and make sure they will be able to adhere to codes and ordinances and pull the required permits.
Capital Farm Credit
26611 Southwest Freeway, Rosenberg
First Community Credit Union