How to Finance Your Home Remodeling Project

Many homeowners seek financing to pay for large home improvement projects. Home additions, major kitchen remodels, major bathroom remodels and whole-home remodels are the type of home improvement projects that require many homeowners to secure a loan. Financing can be easy to get, but it's important to take the time to do your research, shop around, get the best loan and know the risks. This is the safe way to borrow.

Talk to Qualified Lenders

Finding a reputable and qualified lender is important. Credit unions and banks tend to be reputable sources for financing. Online sources can be good lenders as well, though it is important to be discerning as you sort through online lenders. Some online lenders have an expedited approval process, conduct loans entirely online, and can deposit money in your bank account in a matter of days.

Shop around for the best loan. When exploring loan options, consider interest rates, payment terms, the length of the loan and the monthly fee. Watch for any red flags that could indicate a lender is not reputable. For example:

• Not interested in a credit check. Lenders use credit checks to decide when a borrower is high-risk. If your lender does not require a credit check, this could be a sign that lender does not have your best interests in mind.
• Fees are not disclosed up front. The best lenders are transparent and give borrowers all the information they need up front to help them make the best decision possible.
• Lender is not registered in your state. Even online lenders are required to be registered in the state where you are borrowing money.
• Lender requires borrowers to wire money. No good lender will ever ask you to wire them money, so this is a big red flag. Watch out!

Read the payment terms and all lending papers thoroughly before signing. Information in lending documents can also help you choose the right lender for you.

Get Your Finances In Order

Lenders require borrowers to prove they are capable of paying for their loans. Lenders may ask you for documentation such as:

• Pay stubs
• Bank account statements
• Tax bills
• Tax returns
• Credit report
• Home insurance policy
• Recent appraisal

Requirements can vary from one lender to the next. Ask lenders up front what they need to see, then spend some time gathering that information in the days before applying for financing. Submitting all the paperwork up front and in an organized way makes applying for a loan easier and faster.

Know Your Options

There are several different types of home loans that homeowners use to pay for their home improvement projects. The type of loan options available to you depends on how long you've owned your house, whether you still have a mortgage and how much equity is built up in your property. If your home was newly purchased and you have little equity in your home, your options will be limited. The more equity in your home, the more loan options will be available to you.

• Home equity line of credit (HELOC). This secured loan is based on your home equity. This type of loan works like a credit card to which you can charge expenses as needed. The amount in the line of credit is based on the equity in your home, up to 80% of your home's value.
• Home equity loan. A home equity loan is a secured loan based on your home equity, but unlike a HELOC, it's delivered to you in a lump sum which is paid back in fixed payments over time. This is a type of second mortgage: it is not a mortgage refinancing option.
• Personal loan. Personal loans are unsecured loans. The amount you can borrow is based on your credit information and payment history. These loans are easy to get if you have a good credit history, but can be harder to get with a poor credit history.
• Credit card. Credit cards are another type of unsecured debt. Compared to loans like HELOCs and home equity loans, credit cards have a relatively high interest rate. However, some homeowners choose to put their home improvement expenses on a credit card if the amount to be borrowed is relatively small. Some homeowners choose credit cards over other types of loans simply because they're easy to obtain and require little information up front for an approval.
• Cash out refinance. A cash-out refinance replaces your old mortgage with a new mortgage that is for a larger amount. The difference between your old and new mortgage is paid to you in cash, which you can then use to pay for contractors and materials. A cash out refinance resets the payment terms on your loan, but most homeowners only take this option if the interest rates are lower than their original loan, so they can get a better deal than the one they got when they bought the house.

Secured Vs. Unsecured

You'll hear a lot of technical terms when you purchase a home. One of the more important terms to pay attention to is secured debt versus unsecured debt. Secured debt is backed by collateral - usually your home. If you default on secured debt, your collateral could be taken away. Unsecured debt is higher risk for the lender, so you'll likely pay more for the loan.

You should always know and weigh the risks of borrowing against your house. Make sure you're in a good place financially before making large-scale home improvements.

Communicate Your Budget When Talking to Contractors

Be up front with your contractors from the first meeting about your budget. Your contractor can help you decide what cost realistic for your home improvement goals, and if your budget is too small for the project, your contractor should know that in advance.

Build a margin of error into your budget just in case something goes wrong. Home improvements like home remodels and even home additions can reveal problems hidden in the walls. Rot and water leaks can require repairs before your improvement project can move forward. Set aside about 10% of your budgeted amount just in case your contractor does discover something unexpected that increases the scope of the remodel.

Contact Gilbert Design Build About Your Home Improvement

Get started planning your upcoming home improvement. Work with a contractor with a respected name in home remodeling and repair in your community. Gilbert Design Build can help you through the home improvement process, from the planning stages and beyond.