Home Improvement Loan

A home improvement loan will often take the form of an equity loan, typically for a fixed amount rather than a line of credit. If you have equity in your home, many financial institutions will be eager to make this type of loan to you at a reasonable rate of interest, since the home improvements that will be made with the proceeds will increase the value of the collateral property.

There are also FHA programs available to help. Section 203(k) is a type of insurance provided by the FHA that allows a homebuyer to finance the purchase of a house, as well as rehabilitation and improvement costs, in a single mortgage loan, a tool that is especially useful for the handyman who wants to purchase and repair a “fixer-upper” to save money. Straight-out home improvement loans on existing property can also be insured by the FHA through Title I property improvement loan insurance. This type of FHA insurance protects lenders against defaulted home improvement loans—a tool that makes lenders more willing to make these types of loans. The maximum amount for a Title I loan is $25,000 for a single family home.

When arranging for home improvements, it’s best to try to arrange the loan through a trusted financial professional, rather than directly through a contractor. When you think about it, this makes sense. Does your banker offer to come over to your house with a tool belt and repair your siding? Not likely. A contractor that offers to do your banking for you may be up to no good.

A common scam works like this: a contractor knocks on your door, offering to do some needed repairs, and informs you that you do not have to put any money out up front, instead, he will arrange for financing with some bankers with whom he happens to do business. Later, after work has already started, he will bring papers by for you to sign, which you later discover charges an unreasonably high rate of interest, places a lien on your home, and carries strict default terms. When you can’t pay, or if you’re late, they default, and you lose your home.

Using the equity in your home to get an improvement loan can be a valuable tool, but proceed with caution, and procure the loan only through a reputable, trustworthy banker, never directly through the contractor.