The Run-Down on Home Improvement Loans

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After months of being stuck in our homes, many of us are ready for something new. And, since many Americans will continue to work from home, some of us actually need to upgrade or reconfigure our living space. In a recent survey by YouGov, 25% of adults plan to spend more in the second half of 2021 on home renovations.

If you count yourself in that number, there are a few things you should consider as you plan to renovate or upgrade your home.

TAKE STOCK

First of all, take stock of where you are – realistically. Can you take on another monthly payment? You’ll want to sit down and look over your budget. Do what is called “shocking the budget” by trying different scenarios. If I add X amount monthly payment, what happens? Test the limits of your budget by figuring out the biggest amount you could realistically add as a monthly payment – then reduce that amount by at least a third to give yourself wiggle room. As we know, unexpected things do happen!

The second thing to consider up-front is your credit score. Generally, the higher the score, the lower the interest rate you’ll get. If your credit score is not good, you may wish to focus on building your score before taking out a loan at what is likely to be a high interest rate.

Thirdly, determine whether the home improvement will add value to your house and therefore be a good financial investment. After all, you are paying interest on the money you will be using, so ideally, the expenditure will result in higher home value. If the improvement is not necessarily a high ROI project, ask whether it will make living in your home more pleasant well into the future. Being happy in your home long-term is important too!

WHICH LOAN?

So, you’ve analyzed your budget, you have a strong credit score, and you’ve determined the financial value of the home improvement. What next? Now you need to decide what type of loan to get.

Home improvement financing options fall into two main buckets. One bucket gives you a fixed monthly payment. The other bucket may result in variable payments. Here’s a quick run-down:

Personal Loan

One of the great advantages of this type of loan is that you can use it on anything – not just home improvements. It is not dependent on the value of your home, but it does rely heavily on your credit score. Usually, you will have fixed monthly payments on this type of loan, and it will be an additional monthly bill.

Home Equity Loan

Not to be confused with a HELOC (see below), this type of loan is like a second mortgage. So, it uses your house as collateral and it usually gives you fixed monthly payments and a lump sum of money. It will be an additional monthly bill.

Cash-Out Refinance

This option is similar to the Home Equity Loan in that it is a mortgage. However, in this case the house is re-mortgaged at a higher amount and you receive the difference in a lump sum. This too generally has fixed payments. Since it is part of a refinance, there is no additional monthly payment to deal with.

HELOC

This is an option that does not automatically pay out in one lump sum. Instead, you pull money as you need it, so this may be an especially good option if you are unsure how much you will need for your home renovation or if your renovations will go on for a while. You pay interest on what you use, so your monthly payments will vary. In this case too, the house is used as collateral. You will have an additional monthly bill.

Keep in mind that as a member of Tech CU, a not-for-profit financial institution, you can access our favorable rates!

If you need assistance deciding which option is best for you, feel free to reach out to a knowledgeable banker at Tech CU. We are here for you and there are many ways to consult with us. Feel free to come in to one of our physical branches in the Bay Area or visit the Tech CU Virtual Branch by making an appointment. You can also browse loan information on our website. We look forward to speaking with you and helping you achieve your goals!