The Basics of Home Improvement Loans
Home improvement loans are designed to help borrowers make improvements on their homes.
It can be used for such things as adding a new room, remodeling a kitchen, building a pool, or re-carpeting the entire house.
As a secured loan, collateral is required - current equity in the home. To qualify for possible tax deductions, the improvements must be on the borrower's primary residence, not rental property, second home, or vacation home.
The interest rate on the home improvement loan is typically lower than other secured loans because it is less risky, plus it tends to enhance the borrower's home. Borrower's must own their home or be making payments on their home to be eligible for a home improvement loan.
Home Improvement Loans
Home improvement loans are designed to help borrowers remodel or add additional features to their homes.
Kitchen and bath remodeling is the most popular home improvement, but other purposes such as installing a new roof, building a garage, or adding a swimming pool are other common improvements.
There are two types of home improvement loans available to most borrowers; Traditional Home Improvement Loans and FHA Title I Home Improvement Loans.
With either type, the borrower must own or be buying the home since it is to be collateral for the loan.
Traditional Home Improvement loans require the borrower to have substantial equity in the home, usually 20 percent or more. The existing equity in the home, along with that created by the improvements, is the collateral. The lender secures the loan taking a first or second lien.
Most home improvement loans are for ten years or less, although some lenders have programs allowing for up to 15-year repayments, depending on the amount of money borrowed. As with mortgages, the interest paid on home improvement loans is tax deductible.
Interest rates on home improvement loans are usually significantly lower than those for personal loans because lenders consider them risky. FHA Title I Home Improvement Loans are a U.S. Government program to help borrowers rehabilitate or improve their homes just like traditional home improvement loans.
This program is available through approved lenders, usually banks. Certain types of improvements such as swimming pools and barbecue pits identified as luxury items are not allowed under the Title I program.
With Title I loans, the borrower is not required to have any equity in the home for collateral. The repayment period can be as long as 20 years and borrowers can have had past credit problems providing they have demonstrated recent acceptable credit.
With loan requests under $7,500, the lender does not take a lien on the home. These requirements are less stringent than traditional home improvement loans and make it easier for more homeowners to participate. Interest paid is tax deductible.
