What Is a Home Improvement Loan?
When you are considering making renovations to your home but don't have the cash upfront to pay for the projects, various options can make it possible for you.
A home improvement loan allows homeowners to borrow money for their renovation plans when they don't have the savings to pay out of pocket. Home improvement needs sometimes sneak up on homeowners. Renovations can be very expensive, rack up tens of thousands of dollars, and many homeowners just don't have the funds saved for home repairs.
What Can You Do With a Home Improvement Loan?
Different types of home improvement loans exist for your benefit. Whether you are looking into doing a full remodel or just want to renovate a room in your house, you have options for nearly every need.
Funds from these loans can go toward both crucial repairs and fun, voluntary projects. If you have outdated plumbing that needs immediate replacing, for example, a loan can help you address these problems promptly, even when you find yourself with little time to save.
If you have a room you'd like to transform into your own sanctuary, a loan can also cover costs from this project even though it's not a necessity.
How to Use a Home Improvement Loan
Many homeowners who borrow money via a home improvement loan do so to either boost their home's value or make their house more enjoyable to reside in.
Common uses of home improvement loans include the following:
- Upgrading old carpet to hardwood floors
- Building a garage
- Adding a second bathroom
- Painting the exterior
- Fixing a leaky roof
- Replacing drafty windows
You could spend your loaned funds on tons of projects.
Many homeowners who borrow money via a home improvement loan do so to either boost their home's value or make their house more enjoyable to reside in.
How Do Home Improvement Loans Work?
Now that you know what home improvement loans are commonly used for, let's review specifically how these loans work.
1. Decide What Projects You Want to Tackle
The first step in getting a home improvement loan involves deciding what projects you want to complete. You should identify the repairs or renovations and how much they will cost.
If you have your own funds to pay for these projects, that's always preferable. For those times when you don't have the savings but are ready to get started, you can opt for a home improvement loan instead.
2. Find a Financial Institution
Once you understand approximately how much you will need to spend on your project, you can start looking for a financial institution to lend you the money.
You can get home improvement loans through one of the following institutions:
- Traditional banks
- Credit unions
- Online lenders
When choosing a financial institution, you must explore their home improvement loan options as well.
3. Find the Type of Home Improvement Loan You Want
Again, you can choose from a few different types of home improvement loans. When finding the right one for you, you'll have to check out the qualifications.
Some loans have prerequisites for minimum credit scores and a certain amount of equity in your house. You'll want to make sure you meet the minimum before submitting your application. Once you know you qualify for the loan, you'll need to go over every detail, including:
- Loan amounts
- Monthly payments
- Loan terms
- Fees and penalties
- Interest rates
- Whether the loan is secured or unsecured
- Automatic withdrawals
- Prepay penalties
Some financial institutions share pre-approval letters if you are eligible for the loan.
4. Apply for the Loan
Once you've found a loan type that makes sense for your home improvement needs, you'll need to get your information together to apply for it.
Depending on the type of loan, most institutions ask that you provide the following:
- Proof of income
- Housing costs
- Debt
- Valid identification
- Social Security number
You will then submit an application accompanied by this documentation and wait to hear back.
5. Get Approval and Receive the Loan Funds
If the institution approves your loan application, you could receive the funds any time over the next several days or weeks, depending on the type of loan.
Every loan has different terms, and you should pay close attention to the details. Ensure you are ready when the time comes to start making periodic payments to repay the loan.
The Differences Between Secured and Unsecured Loans
The various types of home improvement loans fall into two categories, and both pose advantages and disadvantages. In short, a secured loan uses a person's property as collateral to support it, and an unsecured loan has no collateral attached.
A secured loan uses a person's property as collateral to support it, and an unsecured loan has no collateral attached.
Secured Loans
When collateral connects to a secured loan, financial institutions are more likely to extend the following:
- Lower interest rates
- Higher loan limits
- Longer repayment terms
If you neglect to pay back your loan, the bank can seize your collateral as payment. The Federal Trade Commission (FTC) notes that you can anticipate borrowing up to 85% of your home's equity.
It's best for borrowers with a poor credit history or no credit whatsoever to opt for a secured loan. You can even use secured loans to rebuild your credit and boost your credit score.
Unsecured Loans
Unlike secured loans, unsecured options don't require collateral. These types of loans are also sometimes called signature loans because, as long as you meet the lender's requirements, a signature is the only thing needed to borrow the money.
Financial institutions often use a person's credit score to determine whether to give out an unsecured loan. This loan type also typically comes with higher interest rates and lower terms than those of a secured loan.
Types of Home Improvement Loans
- Home Equity Loan
- Home Equity Line of Credit
- Cash-Out Refinance
- Rapid Home Improvement Loan
- Believable Banking Home Improvement Loan
- Credit Cards
Types of Home Improvement Loans
There is not an overall best type of loan for home improvement. Your project and financials will determine which one serves best for you.
Three common types of secured loans for home improvement projects include:
And the following two are types of unsecured home improvement loans provided by Midland States Bank:
Home Equity Loan
In the simplest terms, a home equity loan is a secured loan in which you can use the equity you built in your home as collateral to borrow money from an institution.
Financial institutions give home equity loans to borrowers in a lump-sum payment. The amount of money will depend on a few different factors, like the financial institution, the amount of equity you have available, and the project you need to fund.
With a home equity loan, it's best to have a predetermined budget before spending. This way, you know how much you can spend and how much you'll repay every month.
Borrowers pay back these loans in fixed installments over a set period. Be prepared to pay both principal and interest as part of these monthly payments. Remember that the shorter your loan term is, the higher your monthly payment will likely be.
Home equity loans also typically have longer repayment terms, perfect for a 10-year home improvement plan.
Home Equity Line of Credit
A home equity line of credit (HELOC), another type of secured loan, also uses your home equity as collateral.
This collateral provides added security for the financial institution, and borrowers can enjoy a lower interest rate compared to an unsecured loan type.
A HELOC gives the borrower access to a line of credit for their ongoing needs as they pay for home improvement projects.
While home equity loans have fixed interest rates, HELOC rates vary by institution. And instead of supplying the money in a lump sum, HELOC provides funds as needed.
Most banks will not extend HELOCs to a borrower unless they meet certain requirements, such as the following:
- Consistent income
- Good credit score
- A certain amount of equity in their home
- Responsible payment history
- Low debt-to-income ratio
Cash-Out Refinance
With a cash-out refinance, you can use the equity in your home to pay for your next renovation or repair. This secured loan type fits into the category of mortgage refinance.
When you opt for cash-out refi for home improvement projects, you take out a new mortgage on your home. This mortgage will be more than what you owe on the home loan you currently have, but less than your home's current value. Then, you will receive the difference between the loan balance at closing and the new amount you borrowed.
You may be able to do the following when you refinance your mortgage at most financial institutions:
- Shorten your loan term
- Reduce monthly payments
- Lower your interest rate
- Finance your home improvement projects
Unsecured Home Improvement Loans
If you are interested in a loan that does not require equity in your home, then an unsecured home improvement loan may be the best option for you. Because no home equity is required, an unsecured loan is often easier and much faster to get than other types, such as home equity loans.
The terms and amounts available for unsecured home improvement loans will vary based on financial institutions. Midland States Bank's Rapid Home Improvement Loan offers loans up to $25,000 — plenty for most renovation projects. You can enjoy fast cash, meaning the process to get your funds is usually quite speedy. Loan terms usually have longer periods as well. Midland offers up to as much as 15 years*.
Many home types are eligible for this home improvement loan without equity, including the following:
- Single-family detached homes
- Townhouses
- Condominiums
- Duplexes
Borrowers typically have fixed payments for home improvement loans, so you'll never face any surprises and can easily budget around your payments.
Affordable Home Improvement Loan Programs
Another type of unsecured loan offered by Midland States Bank is the Believable Banking Home Improvement Loan. Only select neighborhoods can receive this loan program. The Census Bureau determines which neighborhoods are eligible for this type of program. This affordable home improvement loan program offers many benefits, including the following:
- Flexible credit score requirements
- No mortgage insurance requirement
- Below-market interest rates
- Availability in certain low-to-moderate income areas
- Availability in major-minority census tracts
- Up to 100% loan-to-value
The Believable Banking Home Improvement Loan is an affordable option, but your home's location must qualify for this type of loan.
Credit Cards
Another way to borrow money for home improvements that won't take tons of time is by applying for a credit card.
These monetary solutions are handy for ongoing projects that you don't anticipate costing tons of money but are just outside your budget. One of the greatest benefits of using your credit card to cover home improvement costs includes the opportunity to accrue rewards. Just remember that it's important to pay off your balance each month to avoid paying more on interest.
Factors to Consider
When looking into getting a home improvement loan, you will want to think about some important factors. Consider the following three points before you sign any papers:
1. The Project Benefits
Before applying for a loan, you should understand how your project will benefit your home and you.
Many home improvement efforts boost a home's value and allow you to receive a greater return on investment (ROI) if you choose to put your house on the market.
Beyond increasing your ROI, repairing parts of your house can save you money in the future. An example of this would be fixing a leak in your roof to prevent further damage in the face of a storm or another type of flooding event.
2. Your Loan Eligibility
It's crucial to do some prior research before applying for a loan. Make sure you are eligible for one according to the financial institution's terms and conditions.
Review any documentation you have regarding your income and financials. It can be especially helpful in getting approval if you can present a record of paying your bills on time and in full. This information helps demonstrate that you are an attractive candidate for a loan.
3. The Best Loan Type for You
Don't just apply for any and every loan available. Instead, do your research and find the type that makes the most sense with your home improvement project and financials. Consult with a banker if you have questions or concerns about what kind of loan you should seek.
Learn More About Home Improvement Loans From Midland States Bank
With an understanding of the different types of home improvement loans, you can determine the loan that makes the most sense with your project and its needs.
Midland States Bank is a strong and growing diversified financial services company that prides itself on being more than a bank. We offer various home improvement loans that provide an affordable pathway to creating your dream home.
Learn more about home improvement loans from Midland States Bank today, and fill out our contact form when you're ready to get in touch!
