NEW YORK (RateWatch) – A home renovation project can be a great way to perfect your dream home (and add a bit of value to your property), but it doesn’t come cheap. That’s why many homeowners choose to take out loans – usually by tapping their home equity – to finance renovations.
A number of banks offer these home improvement loans, which are home equity loans that can only be used for a home renovation project, but the truth is that they don’t offer a better deal than a standard home equity loan. RateWatch tracks hundreds of banks that offer such loans, finding interest rates ranging from 4.38% to 9.99% at various terms. While one might think that these specialized products are the best option for financing your new kitchen, the terms are nothing special.
“The best deal you can get is a home equity loan or line of credit,” says Guy Cecala, a mortgage expert and publisher of Inside Mortgage Finance Publications. “Assuming you’ve got good credit and equity, you’re not going to beat that.” In addition to a lower rate and more flexibility in spending the money, he also explains that standard home equity loans are interest-only, whereas home improvement loans are self-amortizing (that is, payments include both interest and principal).
RateWatch uses a slightly different methodology for evaluating home improvement and home equity loans, making a direct rate comparison between the two difficult. But a look at banks that offer both products backs up the assertion that you’re better off with a home equity loan or line of credit. Summit Federal Credit Union of New York, for instance, offers a 60-month home improvement loan at a 5.95% fixed APR; a home equity loan at the same rate carries a rate of 4.75%.
For homebuyers purchasing a fixer-upper, there’s another option for home improvement, though. Through its special 203(k) program, the Federal Housing Administration insures home rehabilitation mortgages, allowing the buyer to finance both a new home and the cost of improving it. The mortgage amount is based on the projected value of the home once the improvements are made.
Sure, there are some hoops to jump through – for starters, you have to have a contractor and bids upfront, rather than simply telling the bank how much you expect to need for the project. But if it saves the headache of obtaining separate financing, a lot of homebuyers will gladly jump through those hoops.
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