- Emma Parker
- May 13, 2022
You are not alone if you have dreamt of doing up your home and your budget is not big enough to cover the cost. You want to spruce up your house to either increase the value of your property or to give it a lavish look. A lack of budget can keep you from doing so.
As a result, you decide to take out a home improvement loan. The cost of the debt depends on your credit history, the amount you are borrowing and other factors.
What are Home Improvement Loans?
Home improvement loans are personal loans that you take out for the refurbishment of your house. Whether you need money for small improvements or major, you can apply for these loans. There are multiple factors you need to ponder to remodel your house.
As these loans are not subject to collateral, interest rates can be high. Now the question is if it makes sense. Continue reading to know the answer.
Do Home Improvement Loans actually affect your Home’s value?
Most of the people take out home refurbishment loans to increase the market price of their houses. However, it is imperative to know that your home value will not increase pound for pound. You are wrong if you think you can cover the entire cost of the debt by selling your property.
The purpose of remodeling loans should be to make your house livelier and cozier. These loans will make your house more livable but cannot significantly increase the value of your house. If you are looking to borrow money to increase the market value, you should talk to a real estate agent once. They can help determine what kind of remodeling can be profitable.
Factors to look at while considering a Home Improvement Loan
You should look at several factors before applying for these loans. These factors can help decide whether these loans are actually worthwhile:
The cost of Project
You will have to determine the cost of the project to see if it is an inexpensive deal. Get the estimate of materials used in the remodeling of your house. Find out how much portion of the cost you can pay upfront. Bearing some of the cost in cash will save money in interest payments. If you can pay some money in cash, you should.
The Home Equity
Another critical factor is the equity of your home. It is determined by subtracting the mortgage you owe from the value of your house. It is vital to determine this amount because your lender will decide the lending amount based on your house equity.
Consider Loan Term
The loan term can be small and long but note that the smaller term loans require bigger monthly instalments, and long-term loans require smaller monthly payments. A longer term will be the best bet if you are on a budget. You will need to see how much it will cost you in total when you choose a short term and a long term. You cannot make this decision based on your current financial decisions, but you will also have to see your future financial condition.
Debt to Income Ratio
A lender will look over your debt to income ratio as this suggests how much of your monthly income will go toward the debt payment. You should try to keep the ratio less than 35%.
How long do you want to live in this House?
If you do not intend to live in the house for five years, it may not be a wise decision to take out a home improvement loan. If you need money for more minor modifications, you can go ahead. Otherwise, you should drop the idea.
What are the Types of Home Improvement Loans?
There are several types of home refurbishment loans you can apply for. However, no funding source can be straightaway said to be the best home improvement loans in the UK as they all have some limitations.
One of the most popular funding sources to do up homes is a personal loan. These are unsecured loans. As there is no risk of losing any valuable assets and they allow for borrowing a large sum of money, they can help you make significant improvements.
As they are not secured against any valuable assets, you may end up paying high-interest rates, especially if you have a bad credit score.
Home Equity Loan
A home equity loan can be a better and cheaper alternative to a personal loan. When you borrow money in the form of home equity loans, the equity will be treated as a security. Therefore, you will be able to borrow money at a lower interest rate.
This kind of funding source will replace your existing mortgage with a larger one. This will be a cheaper option because you will likely get lower interest rates at the time of refinancing.
Important Drawbacks to note down
Although they all seem to be a better option, they have certain drawbacks as well.
- Cash-out refinance and home equity loans can let you enjoy lower interest rates than personal loans, but you may lose your house if you fail to pay it back on time. If you use a personal loan, you do not have to lose anything.
- Personal loans can prevent you from losing collateral, but default fees could be higher if you fall behind repayments.
Tips to get the best Personal Loan
If you have decided to refurbish your house, you should consider taking out unsecured loans. Since each lender has a different policy about lending money, you should follow the following tips to get the best personal loan:
- Keep your debt to income ratio low. It should be less than 35% if you want to get money at competitive interest rates.
- Pay off all your outstanding debts. Any current outstanding debt, including credit card bills, can increase your chances of rejection, and if any lender signs off on it, a high-interest rate will be levied.
- Do not fill in multiple applications as this will affect your credit score, and you cannot get money at lower interest rates.
Does it actually make sense to apply for Home Improvement Loans?
Now you can quickly tell the answer to the question of whether it makes sense to apply for home remodeling loans or not. The fact is that if you are doing it just for the purpose of increasing the market value of your house, you are simply slipping up.
In fact, it will harm your profits by increasing the cost of debt payments. If you want to spruce up your house to make it livable, make sure you are going to stay in the house for at least five years. The increased value of your house within the period of five years can help you cover some of your costs.
Look at your credit score and repaying capacity to see if you can get money at affordable interest rates and pay back the debt quickly. If you do not get money at competitive interest rates, you should postpone the idea of remodeling your house.
Emma Parker is a financial counsellor at LondonLoansBank and has been serving for over 5 years. She is a psychology graduate from the University of Glasgow. Since she has keen interest in the finance field, she pursued a diploma course in banking and finance that led her to opt for her current career. She assists people choose the best loan based on their current financial situation and credit score. As Emma understands how people react to money problems, she gives them a helping hand to solve their financial complications.