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How Do Home Improvement Loans Work?

After learning how home improvement loans work and securing one, a young couple and their dog start prepping a room for painting.
Girl and dad with dog looking at home improvement ideas

A home is one of the largest investments you make. To protect your investment, you’ll want to make sure it’s well maintained that it increases in value. That could include doing some necessary repairs like a roof replacement, fixing damages, or even updating the plumbing.

If you decide not to use cash on hand, you can fund these upgrades with a home improvement loan. We’ll detail below how home improvement loans work and which one is best for you!

What Is a Home Improvement Loan?

A home improvement loan is a secured loan designed to help you finance any type of home improvement project. Project examples can include repairs for your home, kitchen remodeling, HVAC or roof replacement, window upgrades, and much more. With the hot summer climate in Arkansas you want to be sure your home is ready to keep your family cool.

As you would with other loan types, you’ll have a fixed rate and a fixed monthly payment for a set time—up to 15 years at Telcoe Federal Credit Union. A home improvement loan is not the same as a home equity loan or home equity line of credit even though those may also be used to finance a renovation project. But, we’ll share more about those later on.

How Do Home Improvement Loans Work?

Home improvement loans are offered at credit unions, banks, and online lenders. Applying for one is similar to applying for any other type of loan. You’ll need to provide basic financial information including your credit score, credit report, income, and other factors that will help the lender determine the loan terms and whether or not you qualify.

At Telcoe Federal Credit Union, a credit score of 680 or higher ensures you’ll be able to qualify for the best loan terms with a loan amount of up to $25,000. Our application fee is only $15 and you will pay nothing at the closing table!

Pros of Home Improvement Loans

One of the best benefits of a home improvement loan is its fixed and lower interest rate. Having a lower interest rate on a high loan amount for a longer period of time allows you to save a lot in the long run.

This loan type also gives you the flexibility and freedom to utilize it for a range of improvement projects. Upon approval, members of Telcoe Federal Credit Union can expect loan funds to be available as quickly as the next business day.

Cons of Home Improvement Loans

Your credit score and financial history are the most important factors in determining whether you qualify for a home improvement loan. If you’re working to improve your credit (or have a score lower than 680), reach out to our Telcoe Loan Specialists about other options. They’ll be happy to provide further insight into how to improve your score. In addition, Telcoe members can visit to assist with any high rate credit card debt or receive a FREE credit report review.

Make sure you’re realistic with submitting loan applications. Too many credit requests in a short time will make you seem a high risk to lenders. With any loan amount, you need to be sure that you’ll pay it back within the agreed time.

Options: Home Improvement Loans

If a traditional home improvement loan isn’t exactly what you’re looking for, there are plenty of other options. The ones mentioned below can be used to help fund home renovation projects.

Home Equity Loan

A home equity loan is a secured loan that allows you to borrow against your home equity. This loan offers a fixed interest rate and repayment term. You’ll also receive the money you borrow in a single lump-sum payment.

Because your home serves as collateral, lenders view home equity loans as less risky, so they usually come with a lower interest rate than other forms of financing. With Telcoe you can borrow up to 90% of your homes tax value, minus your first mortgage balance.

Home Equity Line of Credit (HELOC)

With a home equity line of credit or HELOC, you’re approved for a line of credit up to a certain amount. You then repay the funds slowly over time. In this respect, a HELOC works similarly to the way a credit card does. Typically, lenders will let you borrow from 80% to 95% of your home’s equity.

When you obtain a home equity line of credit, you’re given a draw period or length of time during which your line of credit will stay open. Draw times typically average 10 years. After the draw period is over, you enter into the repayment period, which can be anywhere from 10 to 20 years. Rates on HELOC's are normally adjustable and tied to the prime rate.

Cash-Out Refinance

Another great home improvement loan alternative is a cash-out refinance. Instead of securing another mortgage, you substitute your existing mortgage with a larger and new one.

For example, your mortgage might be $300,000 and your home appraises for $450,000. You can secure new financing for $360,000 to repay the original debt and cash out $60,000 for your renovation. 80% of your appraised value, minus your first mortgage balance can be 'cashed out' to use for improvements, consolidation, etc.

Some major advantages of a cash-out refinance is that you’re only managing one mortgage, you have access to the cash you need, and you’re benefiting from competitive interest rates. However, a big downside to these loans is they can be costly and your home must be used as collateral. So, if you don’t repay the loan, the lender can take your house as payment.

Learn More With Telcoe Federal Credit Union

Now that you’ve learned about the different home improvement loan options, you’ll want to weigh the benefits and downsides to choosing one that fits best for you! If you’re wondering how your taxes fit in with a home improvement loan and just how much you may be able to save, keep reading below!

Ready to meet with a Telcoe Home Improvement Specialist? Email or give us a call at 501-375-5321.


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