The basics of home improvement loans

Home improvement loans are designed to help borrowers make improvements on their homes. It can be used for such things as adding a new room, remodeling a kitchen, building a pool, or re-carpeting the entire house. As a secured loan, collateral is required - current equity in the home. To qualify for possible tax deductions, the improvements must be on the borrower's primary residence, not rental property, second home, or vacation home.

The interest rate on the home improvement loan is typically lower than other secured loans because it is less risky, plus it tends to enhance the borrower's home. Borrower's must own their home or be making payments on their home to be eligible for a home improvement loan.

Home Improvement Loans

Home improvement loans are designed to help borrowers remodel or add additional features to their homes. Kitchen and bath remodeling is the most popular home improvement, but other purposes such as installing a new roof, building a garage, or adding a swimming pool are other common improvements. There are two types of home improvement loans available to most borrowers; Traditional Home Improvement Loans and FHA Title I Home Improvement Loans.

With either type, the borrower must own or be buying the home since it is to be collateral for the loan. Traditional Home Improvement loans require the borrower to have substantial equity in the home, usually 20 percent or more. The existing equity in the home, along with that created by the improvements, is the collateral. The lender secures the loan taking a first or second lien.

Most home improvement loans are for ten years or less, although some lenders have programs allowing for up to 15 year repayments, depending on the amount of money borrowed. As with mortgages, the interest paid on home improvement loans is tax deductible. Interest rates on home improvement loans are usually significantly lower than those for personal loans because lenders consider them risky. FHA Title I Home Improvement Loans are a U.S. Government program to help borrowers rehabilitate or improve their homes just like traditional home improvement loans.

This program is available through approved lenders, usually banks. Certain types of improvements such as swimming pools and barbecue pits identified as luxury items are not allowed under the Title I program. With Title I loans, the borrower is not required to have any equity in the home for collateral. The repayment period can be as long as 20 years and borrowers can have had past credit problems providing they have demonstrated recent acceptable credit.

With loan requests under $7,500, the lender does not take a lien on the home. These requirements are less stringent than traditional home improvement loans and make it easier for more home owners to participate. Interest paid is tax deductible.

First Time Home Buyer's Programs

Before you buy your first home, you should check you see if there are any special programs available in your community for first time home buyers. You may be lucky and find such a program that will fit your needs. Even if you're only thinking about buying your first home, you should check out what's offered in your area. Some programs will educate you on how to buy a home.

In fact, here's a short list of things you should look for in a first time home buyer's program. First, make sure the people offering the program have been in business in your community for a reasonable period of time. Some mortgage companies come and go and special offers aren't all they are cracked up to be. Local financial institutions are a good place to start.

Second, Find out what the requirements are to take advantage of the program. The best first time home buyer programs will be designed to help low and moderate income families. They'll offer reduced interest rates, lower down payments, and substantially reduced closing costs. Finally, see if the program offers an education segment.

Ideally, you should have the opportunity to be informed on issues like income and credit requirements, down payments and closing costs, how to budget and save, how to shop for a home, and how to purchase a home. If you select a home buyer's program with all these ingredients, you're sure to save money and make the whole process easier.
Written by: Jonah Robertson

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