Home improvement loans are usually the best kinds of loans to get. If you borrow 10000 dollars you could improve your home enough to make double the money back on resale. If you spend 30000 dollars you could make it all back and another 10000 dollars in profit. If you are a house flipper, and you understand a particular housing market really well, you could go for a flip and invest 50000 to 100000 dollars in renovations, and improvements that are sure to raise the value of the said property. It’s alway smart to invest your borrowed money wisely and spend the money on the parts of the home that will excite buyers the most. Home buyers are generally “emotional buyers”, even when they claim they are not.

If you need an HIL (Home Improvement Loan) for some kind of upgrade to your house, or a client’s house, look no further than OLF – we spend a stupid amount of time researching renovation loans and all-around home upgrade financing. (I don’t personally, but our staff does). Borrowing money to upgrade your kitchen to granite counter-tops, newly tiled back splashes, new appliances, new sinks, new cupboards, etc. is one of the very best ways to improve your house in a way that increases property value.

Landscaping your front and backyard(s) is also a way to increase the value of your home. Once again, a (primary) home improvement loan is the single best way to increase your net worth. Why? Because there isn’t any extra taxes to pay when you sell your primary residency. As long as the housing market is solid in your neighbourhood (which is not that case in the last few years with the near-depression/recession we are in) then you will almost always help yourself by improving your house with an upgrade of some kind. So let us work some examples of different upgrading project you may get a loan for. First, some things to understand about home improvement loans in general.

FHA Home Improvement Loans if You Don’t Have any Home Equity

The FHA (aka – The Federal Housing Administration) has a government program for home owners who need a home improvement loan without having equity in their house. Last our OLF staff looked, the FHA was insuring these home improvement loans for up to $25,000. You can apply with your typical local bank for an FHA loan – it just means the Government will insure your local bank’s loan as long as the loan is 25 thousand or below.

Keep in mind that with an FHA home improvement loan you will be dealing with a higher APR than if you had some home equity of your own. The Federal Government is not doing you any huge favors here really – they are making a profit of homeowners who don’t have equity in their property.

How You Qualify for an HIL

Application for a home improvement loan is the same as applying for any other kind of loan product. The bank will send your application electronically to a central clearing house where they will assess your liability as a borrower, and see if they are willing to take the risk. This is why many banks will try to encourage even borderline borrowers, who may very well have enough equity build up, to get an FHA home improvement loan – that way they are sure to get their money back either way it goes – whether you default on the loan, or whether you are making your payments faithfully every month.

You APR will be decided upon an computer program that weighs your pros and cons as a borrower, and your risk factor. The bank will look at your FICO score, time at employer or “in the field”, time at residence, how much in assets you have, your credit bureau report(s), your marital status, your monthly income, and your spending habits. 

Refinancing Your Mortgage for an HIL

You can also refinance your home mortgage to get the money you need to improve your house or property. This is usually a longer term way to pay back the loan though. Basically you are taking out a larger mortgage (more than what you need to pay for the house) and using some of that cash to do some work on your house, or hire someone to do some work on your house. This is a more extreme way to fund a home improvement project because you are taking more long-term debt. In the end it may cost you more than some of the other options we are going to discuss today.

Using a HELOC (Home Equity Line of Credit)

Arguably, getting a HELOC is the most common way to loosen up some money for a home improvement project. All this means is that the bank issues you a size-able LOC (Line of Credit) using your home equity as security. Most banks (depending on your State, Province, and Country) will approve a HELOC for up to 80% of your property value. If you own your house outright with no mortgage on it, that could mean allot of seed money for any project.

This is your typical HELOC arrangement below;

• you have a property appraised at $600,000 by an appraiser the bank trusts
• you have $400,000 in equity so you owe $200,000 on your mortgage
• using the average number I used above (percentage of 80%) the bank would lend you $480,000 dollars if you owned the house clear and free. Now the bank subtracts what you owe on the mortgage ($200,000), so you could have a HELOC $280,000

I’ve read online where someone tipped this whole HELOC thing right on it’s head, and stated it going down like this;

• your house is appraised at $600,000 dollars, and your mortgage is $200,000 with the bank on the entire property. You have equity of $400,000.
• so the bank will give you 80% on the un-mortgaged amount of 400K, so that is $320,000 dollars they will give you in a HELOC. So the total your HELOC would be tendered at $320,000.

This is not to say you couldn’t get a HELOC of $320,000 in the scenario above, it’s just that it wouldn’t be calculated this way by the lender. To get this higher HELOC the bank would just use a better percentage rate than 80%. For example they could give you a HELOC at 125%, which is the highest HELOC  I have ever heard being approved. I goes like this;

• your house is appraised by the bank as being worth $600,000 in the current Real Estate market
• you owe $100,000 dollars on the mortgage so you have equity of $500,000
• they give you a HELOC at 125% - so that would be like this: $750,000 subtract $100,000 which = $650,000
• if you blow all the money in your HELOC and default on the payments, you will lose your house (most people DON’T do that)

You have to be disciplined with a HELOC though. Many people get approved for the HELOC with the full intention of using it for a home improvement projects, but they end up blowing the money on travelling, new cars, clothes, etc. etc. etc. (it can really ugly – I’ve seen people DRINK and DRUG away their HELOC!) You have to stick to the plan and make the HELOC is paid down ASAP so that your interest does not runaway on you. Most HELOC financing is at a very reasonable APR because the bank knows it has your house for security if you ever default, or go bankrupt in the near ro distant future.

A typical HELOC APR (annual percentage rate) will be 3-4% assuming your Credit Rating is OK (between 670-780 FICO) If your FICO is much lower (550-660%) then you will be looking at an APR between 7-9%. Then there is all the other scenarios in between, depending on your FICO and overall credit rating.

Don’t Get Too Carried Away With Your HIL

This is just a suggestion, because this theory all depends on whether or not you want to stay in the house you are living in forever (and a day). If you plan to stay in your current home for a long period of time (over a decade or more), then you could concievably spend allot of your money (or the bank’s money) really going all out and doing everything in the house, and everything in the yard (and fence). You could set it up in all the ways that really suit you and your family regardless if you “get all the money out of the enventual sale of the property”.

If you only spend money on improving the critical sale point areas of the property, that would be the prudent way to go. Putting a really expensive rain gutter system on your house is great, but buyers won’t see it, and may not even care. They care about the typical areas, like the kitchen, master bedroom, how many bedrooms, washrooms, and vehicle parking the property has, and the exterior of the house – the curb appeal. If you only spend money fixing up these areas of the property you will be “in the money” down the road.

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