Home Improvement Financing 101

Elijah James asked:


You’ve decided to spruce up the homestead with some needed improvements. Fantastic. Now here lies the rub, how are you going to find home improvement financing?

Let’s face it, kitchen floors and new window panes don’t grow on trees. Even though home improvements are an investment that will make you money in the long run, finding the home improvement financing you need now can be difficult, and not getting an adequate amount of funding for your projects can lead to compromises in quality that you may later regret.

Homeowners have a variety of options when it comes to finding home improvement financing. They can borrow against the equity in their homes and various federal loan programs also exist for borrowers. Here’s a few home improvement financing options you may what to consider:

Mortgage refinancing: Now is the time to take advantage of historically low interest rates by refinancing your mortgage to pay for home improvements. You can refinance your mortgage and borrow money against the equity you have in your home. Some banks even offer loans that allow you to borrow more money up front by adding the value of the planned improvement to your equity. Refinancing your mortgage for home improvement financing purposes is a good deal because you’ll have the convenience of just one home loan and monthly payment.

Home equity loans: These loans, also known as second mortgages, lets homeowners borrow money by leveraging the equity in their homes. They’re popular among folks looking for home improvement financing because homeowners are able to deduct the interest from their federal taxes.

Federal Title I loans: If you don’t have much equity in your home, you may qualify for home improvement financing under a Title I loan. These federally-backed loans offer negotiable interest rates and can be tapped for about $25,000. The loans can only be used to pay for essentials however, such as improvements made necessary by a medical condition, not luxuries like swimming pools.

One method of home improvement financing you want to avoid is financing through a contractor. These loans often are made by sub-prime lenders and come with hidden fees. Also, getting financing through your contractor puts you in a poor bargaining position with him when it comes to getting a quote for your home improvement project. When hiring a contractor, it’s best to have your budget and home improvement financing already prepared to ensure the best deal.

Home ownership is like any other investment — you’ve got to spend money to make money. But to get the most out of your home investment, make sure you get your home improvement financing right. Borrow from reputable lenders and don’t overextend yourself.