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
 |
Find a
Contractor
