Looking for a new home? It’ll cost you. According to the U.S. Census Bureau, the average cost of a new home is $388,000 in 2019, a 50% increase over the average cost of a new home in 2009. If that price tag is more than you can afford, you may be stuck with a fixer-upper — or you can stay in your current house.
Home improvement projects can improve the look of your home, boost its usability, and even increase its resale value. While it would be best to pay for those repairs or renovations with money from your savings account, most people don’t have enough money tucked away to cover the cost. That’s when home improvement loans can be a wise solution.
3 Home Improvement Loan Options
Home improvement loans can be a smart way to pay for your renovations. There are three main types you should know about:
1. Title 1 home improvement loans
The Federal Housing Administration (FHA) operates the Title 1 home improvement loan program. With a Title 1 loan, you take out a loan from a bank or credit union, and the FHA guarantees a portion of the loan. Because Title 1 loans are backed by the FHA, there’s less risk to the lender, so they’re more willing to issue you a loan and give you a low interest rate.
You can borrow up to $25,000 to improve a single-family home and you can have up to 25 years to pay it back. You can use the money to make your home more livable or useful, such as adding appliances, installing a new bathroom, or improving its accessibility for those with disabilities.
To qualify for a Title 1 home improvement loan, you need to own the home or have a long-term lease and you must have a debt-to-income ratio of 45% or less. Visit HUD.gov to find an approved Title 1 lender in your area.
2. Home equity loans
With a home equity loan, you work with a bank or credit union to borrow against your home’s equity — the difference between your house’s current value and what you’ve paid so far toward the mortgage.
For example, if your home is worth $300,000 and your mortgage balance is $250,000, your home’s equity is $50,000. If your home’s value goes up, your equity increases as well.
Depending on the lender, you can borrow up to 80 percent of your home’s equity. If your house’s equity was $50,000, that means you could borrow up to $40,000. Use our home equity calculator to find out how much you can borrow.
Your home serves as collateral on the loan, so you can often qualify for a loan with a low interest rate. However, you should be cautious; if you fall behind on your payments, the lender can foreclose on you, and you risk losing your home.
3. Personal loans
Another option to pay for home improvements is to take out a personal loan. Unlike Title 1 improvement and home equity loans, which can take weeks or even months to process, personal loans allow you to get the money you need within two business days. And, personal loans are unsecured, so you don’t have to put up your home as collateral.
Depending on the lender, you could borrow up to $100,000 to pay for repairs and renovations and have up to seven years to repay it.
Lenders will review your credit score and income to decide whether or not to issue you a loan and to determine your interest rate. If you have good credit and a stable income, you could qualify for a loan with a low interest rate, making it an affordable financing option for home improvements.
Renovating Your Home
Home improvement projects can make you fall in love with your house again, and can boost its resale value. By exploring your different financing options, you can pick a loan that works best for your needs and your budget.
If you decide that a personal loan is right for you, check out the best lenders of 2019.
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