About Home Improvement Loans
A home improvement loan offers a way for you to improve your property if you don't have the money to pay for the improvements. The value of your home minus the amount owed on it is used to calculate your equity, and home improvement loans are issued using the equity in your home as collateral.
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Reinvestment in Your Home
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Another way to think about a home improvement loan is to view it as a reinvestment in your home. You're taking equity out of your home to make it more valuable. Repaving a driveway, painting the interior, updating a bathroom or kitchen and installing hardwood floors are just a few improvements that may add to the value of your home.
Where to Get a Home Improvement Loan
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You can obtain a home improvement loan by applying with your bank or mortgage company. (Many banks and mortgage companies have online applications.) You also might want to talk with a mortgage broker, who works with many lenders, which allows them to be more creative in terms of working with bad credit and other lending obstacles.
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Qualifications
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Most important, you must have enough equity in your home. If that's the case, you must have a steady work history of three years or more, and if you're self-employed, you must have three years of tax statements and bank statements.
You'll also need a good credit score. A credit score higher than 650 ensures that you'll pay a lower interest rate on your home improvement loan. And most lenders want your income-to-debt ratio to be below 30 percent.
Significance
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If you have a mortgage on your home, a home improvement loan is much like taking out a second mortgage; it's paid back to your lending institution in monthly installments and includes principal and interest. In some cases, your lending institution may allow you to consolidate your two mortgages into one.
Tax Benefits
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In addition to beautifying and improving the market value of your home, a home improvement loan provides significant tax benefits, because the interest you pay on your home improvement loan is tax-deductible.
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