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Home renovation costs a considerable amount and can really mess up your finances. Whether your home requires a few small upgrades or complete transformation of some spaces, it adds a strain on your bank account, and you might have to consider home renovation financing options.
Taking a loan to finance your home renovations could be the aid you need to go forward with your plans. If you’re confused about finding a financing solution, we have all the information that you need to finance all your home renovation goals.
Adding value to your home by home renovation
Although many home renovation ideas promise beautification of your home, not all of them add practical value to it. When you’re planning to finance your home renovation, you must prioritize projects that add value to your home over the unnecessary extravagances.
If any primary functions and structures of your home are in dire need of a fix, then they have to be put first. It will save you from losing value on your home if you ever need to sell it.
Replacing the garage door, insulation of the home, installing a new entry door, and manufactured stone veneer are a few high-value home renovation projects for which you should pursue financing.
Low-return home renovation projects include additions to the bathroom, deck additions, upscaling the bedrooms, etc.
Financing different types of home renovation projects
The choice of your home renovation project profoundly affects the financing options available to you. For instance, if you finance the remodeling of your kitchen and bathroom with a home equity loan or by refinancing your mortgage, it means you are taking a loan against the value of your home. If the projects financed by such loans don’t add just as much value, then you could find yourself in the loop of these loans for many years to come.
Let’s take the example of a landscaping project. If a professional quotes the price of $6,000 for the landscaping project, the return value on the project could be as high as $6,300, which is an impressive 105%.
Other best return-investment home renovation ideas are energy-efficient upgrades like new appliances, roof, and windows.
DIY home renovation projects
Professional contractors for home renovations cost a lot, and you don’t always need them. Many home renovation projects can be done on your own if you carefully make a budget for all the necessary materials with a safety net to finish your project successfully.
However, for some projects, loan requirements include the hiring of a professional. Make sure you understand these terms before filing a loan application for a particular project.
Home renovation financing options
Many home renovation financing options are available depending on the amount of loan you need, your project, the value of your home, and your credit score. Let’s discuss each one of them below.
Financing with personal loans
Personal loans offered for home renovation financing are designed as term loans, which means that the loan is provided with a fixed interest rate. The repayments are monthly for a set term; the interest rate doesn’t change throughout this time. Personal loans are offered at higher rates of interest because they are unsecured loans, unlike mortgage or home equity loans. They are generally used to pay off credit card debt.
Personal loans are offered by some banks, credit unions, and online lenders. Your eligibility for these loans depends on variables like your credit score and debt-to-income ratio.
One of the best options for personal loans to finance home improvement is provided by Lightstream. The company offers competitive interest rates and highly flexible terms. Additionally, there’s no prepayment penalties or origination fee.
Financing with Federal loan programs
Multiple federal loan programs offer loans for financing home renovations.
FHA Title 1 Loan: If you want to finance a minor home renovation project costing up to $25,000, then this loan is ideal for you. FHA Title 1 loan is insured by the government and offer repayment terms as long as 20 years. They also don’t have a home equity requirement.
FHA 203K Loan: This loan can be obtained for the purchase of a new home or for refinancing. It is a type of mortgage loan that combines the primary mortgage loan od your home with the renovation cost.
Streamlined 203L Loan: If your home renovation project costs up to $35,000, then this is a loan program for you.
Financing with home equity loans
You can be eligible for several types of loans if you have home equity. Home equity is determined by the difference of your home’s market value from the balance you owe on the principal amount. Let’s say your home is appraised for $200,000, and you owe $150,000 on principal, then the home equity will be $50,000.
Home equity is essentially a second mortgage, and it could be an excellent option given that you have enough home equity to borrow against. Look for loans that offer fixed interest rates and terms. Some of these loans have associated fees and closing costs.
Another option could be a home equity line of credit or HELOC. It offers variable interest rates and ongoing access to loan cash for ten years or more. This option offers a lot of flexibility as it functions in a similar manner as credit cards. It allows you to utilize the funding amount on a need-basis, and the interest is only charged on the amount that is used.
Financing with mortgage loans
Mortgage loans offer highly favorable interest rates and make your home renovation projects more affordable as compared to other types of loans. Additionally, mortgage interest is tax-deductible.
However, one of the drawbacks of this loan is that the lender may require you to pay for the insurance of your mortgage to secure their interests. They usually take longer to be funded than other kinds of loans, such as personal loans. Mortgage loans that are federally-backed may also have project restrictions on luxury upgrades.
Financing with credit cards
If you have a credit score of over 700 and need a loan for a reasonably sized home renovation project, then credit cards could be a great choice. You can apply for a credit card with an introductory period of 0% APR.
Conclusion
It’s essential that you compare various loan options for financing your home renovations. Factors like APR, the term of the loan, any penalties or additional fees should be considered carefully.
Always gauge the overall value addition to your home as a result of your home renovation projects and prioritize them accordingly.