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304 North Cardinal St.
Dorchester Center, MA 02124
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Your home may need some love and attention that you can’t afford to pay for out of pocket. When you find yourself in that situation, you may consider taking out a home improvement loan. It’s the answer to a lot of homeowners’ problems: If you have a leaky roof that insurance won’t pay for, you probably can’t wait indefinitely to repair it. But using a loan to cover home improvement costs comes with risks and benefits, and it’s important to make sure you understand them before moving forward with a loan.
It also may be helpful to keep in mind that there isn’t just one way to finance a home improvement project but several—but each choice has its pros and cons.
In this case, you’ll receive a loan based on the equity in your home. You’ll get a lump sum of cash that you can then use for home improvements, and typically, you’ll pay back the loan in installments with a fixed interest rate. While you can spend a home equity loan on nearly anything, it arguably makes the most financial sense to put money you borrow from your home toward fixing up your home and adding value to it.
A home equity line of credit (HELOC) is a line of credit whose limit is based on the equity in your home. You get a draw period—typically 10 years—to take from that line of credit and spend on your home. During that 10 years, you are only required to pay back the interest on the money you’ve borrowed. Once the draw period ends, you enter repayment—often 20 years—during which you pay both principal and interest. HELOCs generally come with a variable interest rate, so the amount you pay will fluctuate based on market rates. Like a home equity loan, it’s typically recommended that you use the home equity line of credit to pay for home improvements or perhaps an emergency rather than funding anything else.
If you’re going to finance a home improvement with a cash-out refinance, you’ll take out a new, bigger mortgage loan on your home. Your previous mortgage is paid off using the new loan, and you get the excess cash, which you can use to pay for home improvements or home repairs.
An FHA 203(k) loan is offered by the Federal Housing Administration; it’s a federal loan program in which you’ll be given money to buy a house and do renovations. These loans are for fixer-upper homes, and the lender will verify that the money is being used for repairs.
Many borrowers take out personal loans to make home improvements. Generally, these are unsecured loans—meaning there’s no collateral attached to the loan—and you pay back the loan in fixed installments.
Sometimes a contractor, like a roofer or window replacement company, will offer a loan, generally with a bank they work with. Like with other types of loans, you’ll repay the loan in installments.
It’s a judgment call on whether there are better ways to pay for home repairs and upgrades than a home improvement loan. But if you are looking for alternatives, there are plenty, including:
You could also do a combination of all the above strategies. Set up a sinking fund for a portion of the money you need, raid the savings account for another portion, and, if there’s still a shortfall, then apply for a small personal loan for the rest.
Home improvement loans ultimately can make your home a nicer place to live, and can make it worth more when it comes time to sell. But if your finances can’t handle another loan or the payments and interest don’t make sense with your budget, you could end up wishing you hadn’t bothered applying for one.
That’s why you’ll want to make sure you apply for a home improvement loan with as low of an interest rate as you can possibly get. Start by checking your credit report and credit score to see where you stand. If your credit score isn’t where you’d like it to be, take steps to improve it before applying for a home improvement loan.
For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our team of experts is ready to help you find the best loan options to suit your needs and make your home improvement dreams a reality.
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