12 Things to Know About Home Repair Loans
If you're a homeowner, chances are at some point you'll need a new roof, want to finish off the basement or remodel the kitchen. If you don't have the cash to front such a project, loans are an option. Here are 12 things you should know about home repair loans.
Secured Home Repair Loans
A secured home repair loan, according to the FDIC, is a loan that uses your house as collateral. This is often called a home equity loan or a second mortgage. The benefits are that you can often get a higher loan amount at a fixed rate and have 10 to 15 years to pay it off. The drawback? If you default, the lender can foreclose on your home.
How Much Do I Qualify For?
The age, condition, location and size of your property, along with your credit rating, are all factors in determining how much home repair loans you qualify for and what the interest rate will be.
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What About Rentals?
If you own a rental property and are looking to get a home repair loan to make some upgrades, you may find getting a loan more difficult. And rental properties pose a higher risk of default because the rental market is less predictable, according to Todd Huettner, president of Huettner Capital, a real estate mortgage broker.
Unsecured Home Improvement Loans
Unsecured home repair loans are less risky for the borrower because it uses no collateral, meaning you won't lose your home if you default. These loans are generally smaller in size (less money) and must be paid back within seven years or less. However, borrowers will usually pay more for these loans because, according to bankrate.com, they usually have higher interest rates.
Is It Truly Unsecured?
If you go the unsecured route for home improvements, shop around for the best terms. Ask lenders questions, including if the loan is 100 percent unsecured. According to Boeing Employees Credit Union, some unsecured loans include having a lien put on your home while you work to pay off the loan.
Consider Upgrades vs. Costs
While home repair loans can help you fund projects that will increase the value of your property, consider how much the improvement will cost and how long it will take you to repay. For example, if you take out a loan to update the bathroom, will it take you two years or 10 years to repay? If it's the latter, your bathroom may be outdated by the time the loan is paid off.
Consider the Economy
You'll pay more in interest during a poor or fluctuating economy as interest rates set by the Federal Reserve will likely be higher. And that means the loan could end up costing more in the long run than any increase in property value your home improvement can bring. Also, if house prices fall, you may find yourself in negative equity.
What About a Home Equity Line of Credit?
Another option for financing a home improvement project is a home equity line of credit (or HELOC). A HELOC, according to Bank of America, is much like a credit card with a high limit. Once you use it, you make monthly payments to pay off your balance. And the interest rate for a home equity line of credit is tied to the prime rate, which means repayment can vary depending on market conditions. Find out home renovations projects you can do right now to add value.
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The Right Contractor
Finding the right contractor for your home improvement is essential. Shoddy work can end up causing your home to lose value and become a money pit. The right contractor can help make that dream addition become a reality both on time and on budget.
Before signing on the dotted line, understand what home repair loans will mean for you come tax time. According to the IRS, any tax benefits will depend on the type of home improvement loan you choose (and the benefits aren't as attractive as you might think).
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Consider a USDA Loan
The USDA (United States Department of Agriculture) offers home repair loans known as the Section 504 Home Repair loan, which is an option for those who may have just average credit, have a lower income and/or are seniors. And to qualify, you must own and live in the home, be unable to obtain affordable credit elsewhere and have a family income below 50 percent of the area median income. These loans can help borrowers repair, improve or modernize their homes, and remove safety hazards.
Understand the Terms
Before signing on the dotted line, understand all the terms of your loan including upfront costs. Some lenders charge hidden fees with home improvement loans, including set up charges and early redemption fees.