Obtaining a Remodeling Loan

Investing in home remodeling and improvement is a very popular trend. Not only do home improvements enhance home usability and quality of life; they improve the appearance of the home and increase property value, as well. Your final floor plan and elevation drawings, along with detailed project and materials costs, are necessary information required when applying for one of the following two types of home improvement loans:

• Unsecured loan - in an unsecured loan, the borrower agrees to repay the loan in installments according to a pre-set schedule. The only guarantee the lender has is the borrower’s signature. This also referred to as a signature loan.
• Secured loan - with a secured loan, the amount borrowed is secured by an asset; owned free and clear by the borrower. This can be seized and sold by the lender in the event the loan is not repaid according to the agreed upon repay installment schedule. Proceeds gained from selling the asset go toward paying off the loan.

In home improvement loans, the asset most commonly used to secure the loan is the home itself. This pledge or promise to pay is called a “mortgage.” There can be more than one mortgage secured by the home. When there is more than one mortgage on the property, they are ranked in priority; hence the terms “first mortgage” and “second mortgage.”

There are essentially three good reasons to acquire a secured loan:

• To borrow more money
• To get a lower interest rate
• To reduce taxes

In preparation for applying for a loan, gather information about options from different lenders. A mortgage broker usually has more lending resources available; a bank often has the “small town” touch, with a loan officer you may know personally. A specialized lender deals with one or two specific types of loans, such as home mortgages or re-financing a mortgage.

A lender can help pre-qualify you for a loan, and can give insight about what the likely result of your application will be. There are three types of lenders:

• Mortgage broker
• Bank
• Specialized lender

When evaluating a loan application, lenders consider the following:

• The applicant’s income
• The applicant’s debts
• The applicant’s credit history
• The applicant’s property value

Many lenders assess a fee based on points. One point is usually 1-percent of the loan amount; a typical fee might be 1 to 3 points. In addition to loan fees, a borrower will have to pay interest on a loan. This will be either fixed or variable.

A fixed interest rate is one that remains the same throughout the payment cycle of the loan; 5yr. – 10 yr. – 15 yr. – 20 yr. etc. A variable interest rate can fluctuate throughout the payment cycle of the loan. Interest rate changes are commonly based on what the current market prime rate is.

There are also other financing options available. Including savings accounts, credit cards, mortgage re-finance, home equity loans, homeowner loans, value added loans, and contractor financing.

The two most popular choices for home improvement projects are home equity loans and value added loans. A home equity loan is a second mortgage based on the equity the homeowner has already built in the first mortgage. A value added loan is based on what the value of the home will be once improvements are completed.

< Estimating Project Cost   |   Financial Options for the Elderly >

The Comprehensive Guide to Home Renovations