Most people are familiar with the process of taking out a mortgage to finance the purchase of a new home. Chances are, they took advantage of a home loan themselves at one point.
What may be less widely known is loans also can be used to make necessary or desired home remodeling projects attainable for all homeowners in Delaware and the surrounding area. In fact, homeowners who want to renovate their home – whether to increase the property value or to make the area more comfortable, safe, or functional– can find several resources for financing the project.
What are common home improvement loans?
People will generally pursue one of two loans when considering home renovations: home equity loans and personal loans. Each option has its own set of requirements, benefits, and disadvantages for homeowners in Delaware.
Home equity loans
For a home equity loan – which acts as a second mortgage on your house – lenders tend to limit the total loan to 85% of your home’s value. They also have fixed interest rates that remain the same over the total life of the loan. This means your monthly payments never change, making it easier to budget for repaying the loan.
The interest rate may vary based on the term and amount of the loan, your credit history, your home’s value, your income, and the existing mortgage balance. In general, though, interest rates on home equity loans are generally lower than those for unsecured products, such as credit cards, making them more advantageous for financing an extensive home renovation project. Additionally, the interest you pay on the loan may be tax-deductible if you’re using it for capital improvements.
On the down side, as you’re using the home’s equity as collateral, you risk foreclosure if you don’t repay the loan on time and also face greater liability for paying off the loan promptly if you sell your home.
Home equity loans are especially suitable for homeowners who have already made substantial payments on their original mortgage and have significant equity in their home.
Personal loans are also popular for undertaking home improvement projects in Delaware and the surrounding area.
Typically, you can borrow between $1,000 and $100,000 for a personal loan, but the payback period is much shorter than that of home equity loans – or about two to five years compared to up to 30. Interest rates on personal loans – which are typically fixed – can range from about 4% to 36%, based on income, credit score, and assets.
Personal loans are advantageous for those who don’t have significant equity in their home. They also allow you to borrow smaller amounts.
The drawbacks of personal loans include higher interest rates and shorter repayment periods. If you’re doing a small project, you may prefer the motivation to repay the loan quickly. However, if you’re undertaking a particularly costly home improvement project, the monthly payments on a personal loan may not fit the budget for some homeowners.
What alternative home renovation loans are available to homeowners?
If neither a home equity or personal loan appeals to you, there are other types of loans and financing options available for tackling major home repairs, room additions or fixture updates with the help of your general contractor. Some alternatives to consider include:
Home Equity Lines of Credit
A home equity line of credit (HELOC) is similar to a home equity loan in that your home’s value is used as collateral. The difference is a HELOC gives you a revolving line of credit that you can borrow against and repay through various methods, depending on the lending agency. One disadvantage is the variable interest rate, which can make your payments unpredictable.
Through cash-out refinancing, you will replace your original mortgage with a cash-out refinance, giving you a new balance, terms of agreement, monthly payments and interest rate on your home’s existing mortgage. The equity produced through the process is provided to you as cash, which you can use for your project.
Title I Loans
Title I loans, insured by the U.S. Department of Housing and Urban Development, can be used to finance both large and small improvements that are meant to substantially protect or improve the basic livability or utility of your residence, such as installing refrigerators, freezers, dishwashers, and built-in ovens or increasing wheelchair accessibility with ramps and widened doorways. This excludes luxury items like outdoor fireplaces and pools. Homeowners can apply at any lender that is approved to make Title I loans.
Energy Efficient Mortgages
Another product insured by the federal government, energy efficient mortgages (EEM) can be used by homeowners for renovation projects that increase the energy efficiency of their house.
Delaware State Housing Authority Programs
Within the state of Delaware, low- and moderate-income homeowners have access to various resources that provide home improvement loans. You also can investigate loan programs backed by the U.S. Department of Agriculture and Veterans Affairs.
Financing your home improvement project
If you want to renovate your home to increase its value or improve its functionality, livability and comfort, you’re in luck. Regardless of your financial situation or the scope of your project, there are numerous private and federally insured resources that can help you access the necessary financing to make your home renovation goals a reality.
“Home Improvement Loans.” U.S. News and World Report. Accessed online at https://loans.usnews.com/home-improvement-loans#alternatives-to-home-equity-and-personal-loans
“ABOUT TITLE I PROPERTY IMPROVEMENT LOANS.” U.S. Department of Housing and Urban Development. Accessed online at https://www.hud.gov/program_offices/housing/sfh/title/ti_abou
“ENERGY EFFICIENT MORTGAGE HOMEOWNER GUIDE.” U.S. Department of Housing and Urban Development. Accessed online at https://www.hud.gov/program_offices/housing/sfh/eem/eemhog96
“Home Repairs Delaware.” Accessed online at https://www.hud.gov/states/delaware/homeownership/homerepairs