Typically, the home represents the single most expensive investment made by an individual during his lifetime. Remodeling and refurbishing the house not only serves to keep it fresh and appealing to the residents but also ensures that the safety of the occupants is not compromised. Furthermore, the value of the house is preserved and improved so that when you are ready to sell it, you will get a better market value. Since home renovations tend to be expensive, most people need to arrange some sort of a financing method to pay for the project upfront while they repay the loan over an extended period. However, before you start applying for the all-important loan, here are some of the most important consideration that you should ponder over:
Borrow the Right Amount for the Right Reasons
Before you go online or start phoning up lenders for details of home improvement loans, you need to decide on the scope of the home rehab first. While you can be tempted to consider a complete home renovation, it is a smart idea to look at only projects that are worth the money that you need to invest in them. For example, renovating your kitchen or bathroom is generally a good idea because not only does it make your life easier but also actually helps to boost the resale value. However, the same is not true if you add a sundeck or any other luxury improvement. Even within projects that make sense, you can spend a lot of money so you should ask yourself how much you should spend and still be able to repay the monthly installments comfortably. It is quite easy to find lenders who are willing to lend you a lot of money but the fact that you can take a large loan does not mean that you should actually do so.
Shop Around For the Best Terms
Even after, you have decided on the financing route for funding your home improvement project, you should make it a point to scout the market comprehensively for the best possible rates before signing on the dotted line. Regardless of whether you are using a credit card, personal loan, or a home equity loan to aces funds, you need to know that the rates of interest and the terms of the contract can and do vary widely depending on the lending policies and risk assessment by different lenders. It can be foolish to assume that your primary mortgage lender will offer you the best terms for the home equity loan because they want to retain you as a customer. Competitive pressures may make another lender give you a better rate not only for the second mortgage but also for the primary one and you could potentially save a lot of money on interest over the remaining period of the mortgage that will make the exercise more than worth your while.
Similarly, credit card issuers and private lenders will offer rates as per their assessment of your risk profile represented by your credit score, credit history, and cash flow. A new credit card that is looking out to acquire debt can give you very attractive terms that can reduce the overall home improvement project cost significantly. According to forbes, a zero-percent APR card can be useful is saving a lot on the interest expense on purchases for your home improvement. Instead of discovering the best rates by chance, it can be useful to use one of the several websites that offer the facility of offering quotes from multiple lenders with just a single query.
Make Sure Your Credit Score Is Good
If you are taking on an unsecured loan like a personal loan or a credit card for funding your home improvement, you should know that your credit score is the most important factor in the rate of interest you are offered. Almost all lenders have specific cutoff credit scores, below which they will not normally lend unless they specialize in lending to customers with bad credit, in which case the rate of interest may well approach that of credit card APRs. The credit score is not that important for home equity loans as the lender has the security of the home as collateral, however, really bad credit history may make them reluctant to lend a large amount even if you have substantial equity in your home.
If your credit score is pulling down the rate of interest on loans, it may be wiser to defer the home improvement project and take steps to improve your credit score by regularly paying off your credit card debt and improving your overall debt to income ratio by paying off debt aggressively. When comparing the rate of interest be sure to look at only the APRs because all lenders have various fees tacked onto the loan, which can significantly raise the impact of the interest rate quoted. Be especially aware of origination fees, prepayment fees, and late payment fees and in case of home-linked loans, appraisal fees that can easily add on another 5-8% of the loan value to the cost.
Conclusion
Borrowing for making improvements to your home is not as simple a task as it may seem. As the very outset, you need to decide on the scope of the improvements so that you can decide on the amount of money required. The next task is to shop around for the best rates because the rates tend to vary widely between lenders. It is also very important to ensure that your credit score is at a healthy level because otherwise, it can be difficult for you to get a decent rate of interest, especially if you are availing of an unsecured loan.
It is very easy to get into a debt trap by borrowing and spending large amounts of money on your home and then finding yourself strapped for cash. In this respect, HELOC are especially dangerous as you are allowed to make only the interest payments for an initial period but when the larger installments become due down the line, it can leave you stranded due to inadequate cash flow, warns a NationaldebtRelief counselor with extensive experience of dealing with customers trapped in debt.