Home Improvement Loans - The ABC's

Home Improvement Loans. You know what those are, right? You want a new kitchen and a fancy new bathroom . . . and maybe a swimming pool out back. You go down to the local bank (remember those?) and ask the guy at the desk for that loan to fix the house up. Used to be that bankers wore gray suits with striped ties. More likely, you'll be talking to someone in a little cubicle wearing a polo-shirt with the bank's logo on it. Banks have changed, haven't they? Guess what? So have home improvement loans. You can still get a home improvement loan at a bank. But depending on the current state of interest rates, and what the interest rate on your existing mortgage is (if you even have an existing mortgage) doing it this way probably will result in you paying more than you ought to.

Usually, there’s a better way of accomplishing the task of financing your repair and remodeling goals, and possibly gaining some other benefits, such as lowering your housing payment and financing costs. The bigger the project the more impact there will be if you make the right choice.

Home improvement loans can initially be grouped into two classes.

If you have an existing mortgage loan secured by the property your seeking to repair or remodel, the home improvement loan you obtain, if you use the method described in the introduction, will be second lien mortgage. The lien that secures the loan will be subordinate to the existing loan. This type of loan has slightly more risk associated with it. It could be an adjustable rate mortgage (subject to rate and payment fluctuation) or a fixed rate. If you elect a fixed rate, a more stable choice that fixes both the rate and payment, it will typically have an interest considerably higher than what you could obtain a first lien mortgage.

If you don't have an existing loan, your home improvement loan will be in a first lien position. This may, or may not, enable you to get a lower interest. The cost of your project will be the key determining factor. Lenders that offer the permanent mortgage loans in a first lien position such as the 15-year fixed-rate described above will often have a minimum loan amount in the range of $100,000. So, you may be forced to obtain a loan priced like the second lien loan described above.

The best approach to obtain financing with the lowest rate and costs will depend on the following factors. Here’s what we need to know to show you the best way to achieve your goals:

  • Do you have an existing loan?
  • If you do, what the interest rate is on that loan?
  • Are current mortgage rates the same or lower than the rate on your existing loan or loans?
  • How much will your proposed renovation or remodeling project will cost?

Because larger first lien mortgage loans have better rates, if you have a project, the cost of which will be almost as big or bigger than the balance on your existing mortgage, you'll likely benefit from refinancing your existing mortgage and obtaining additional cash as part of the refinance to pay for the proposed home improvement project. You might even reap the additional benefit of lowering your interest rate overall.

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