How do Home Improvement Loans Work?

Home improvement loans are a specific type of mortgage that can be obtained by homeowners when they are having construction done, or home improvements done, and need additional financing in order to complete it. These loans can work much like a conventional second mortgage, however a more complex refinancing process might work better for some homeowners.

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When a more traditional mortgage is arranged for a home improvement loan, it can be done in the form of a home equity loan or a home equity line of credit. Home equity loans can be extended over a certain number of years, with regular monthly payments being made on both the interest and the principal of the loan. The interest rates that come with home equity loans are almost always fixed. Upon approval of a home equity loan, the homeowner will be given the full amount of the loan all at once, which can be beneficial for homeowners that are involved in large construction projects, when large amounts of money are needed all at once.

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A home equity line of credit is a second mortgage much like a home equity loan, but lines of credit do work quite differently.

Firstly, lines of credits or HELOCs as they?re also called, almost always work on a variable rate, unlike home equity loans; and instead of making the same, regular payments, the only payments due on home equity lines of credit are interest payments. These will need to be paid until a pre-determined date at the end of the loan, when the entire balance will be due.

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Typically the only requirement that homeowners will need to be approved for a home equity loan or a home equity line of credit is twenty percent or more equity in their home.

This is the total amount of the home that the homeowner actually owns, either by paying their mortgage payments or through their down payment. Even when a homeowner has equity in their home, they will not be able to borrow against all of it, as only eighty percent of the equity is the usual standard that lenders will allow.

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For those that don?t want a traditional second mortgage, a cash out refinance might be a better option. Refinancing can be a complex process that involves a lot of paperwork and can take quite a long time so homeowners need to seriously consider it before embarking on it. A cash out refinance though can allow a homeowner to both change the terms of their mortgage and reduce their monthly payments, while giving them extra cash at closing to use on their home improvements.

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Home equity loans, home equity lines of credit, and cash out refinancing are just a few of the names that home improvement loans go by. Whichever one you choose will depend on what?s best for your situation, as all of them have very different terms and qualifications, and different benefits too. Making home improvements is a great way to add value to your home, and to your investment. And knowing which home improvement loan option to use is a great way to get it done!

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