When selling a home in the DC Metro area, it’s important that the house is in tip top shape before you put it on the market. Easier said than done, right? Spending money on a house that you’re leaving is a hard pill to swallow. That’s why there are DC Metro home improvement loans.
What is a home improvement loan?
A home improvement loan is quite literally what it sounds like — money to help the homeowner make home improvements.
Here are the differences between a normal morgtage loan and a home improvement loan:
- Home improvement loans are usually personal installment loans not collateralized by the home
- There is more risk for the lender with a home improvement loan
- Because of this, home improvement loans will have a higher interest than a normal mortgage loan
- A home improvement loan has a shorter term
What determines the interest rate?
The interest rate is determined by the borrower’s credit score. The lower the score, the higher the rate, and the higher the score, the lower the rate. In today’s DC Metro market, the rates on home improvement loans could vary between 6% and 36%. Anything under $40,000 is considered to be a smaller loan amount; while over $40,000 would be a larger loan amount. A larger loan may actually have a smaller interest rate.
Alternative to home improvement loans
If you are not interested in a home improvement loan, you could consider a cash out refinance for your DC Metro home. These types of loans are collateralized by the home. In this case, the cost of the improvements would be added on to the new mortgage. Note that DC Metro lenders will usually require that the owner maintain a minimum of 20% equity in the home.
Here’s an example of a Montgomery County home:
- Existing mortgage: $230,000
- Improvements needed: $50,000
- New loan amount: $280,000
- Appraisal minimum for 20% equity: $350,000
Advantages and Disadvantages
The advantage in doing a refinance is that you would be making smaller payments per month. Using the above example with a 4.5% interest rate after 54 payments, the owner would pay $1,464.50 with the refinance vs. $2,149.35 on the home improvement loan ($684.85 higher).
The disadvantage, of course, is that you are increasing your amount owed (by $8,700 in the example) and it stretches out your payments over a longer period of time. In short, home improvement loans have lower closing costs than regular mortgage loans.
Home Equity Line of Credit
There is one other alternative to financing your home improvements. It is called a Home Equity Line of Credit or HELOC. Unlike refinancing which comes in one big lump of cash, HELOCs are an ongoing source of funds, kind of like a credit card. The rates are generally adjustable. However, banks may cap your rate or offer a fixed rate for a predetermined amount of time.
The advantages here are that you can access your credit whenever you need it and you don’t have to pay interest on money you may not need. The cons are that, just like a credit card, when something is so easy to use, you may use it when you don’t have to. Once you’ve passed the draw period (typically 10 years), your monthly payment can severely increase if you have not kept up with your spending. The worst-case scenario? Since both HELOCs and home loans are using your home as collateral, if you default on payments, you could lose your home.
It’s a lot of information, we know. Your best bet is to use a trusted mortgage professional in the DC Metro area. The Estridge Group is happy to give you a recommendation. Just give us a call at 301-657-9700.