When you own a home, you can build on an addition, put in skylights, add a pool or make any change you want. Problem is, home improvement can be a costly endeavor. With a home improvement loan, you can get an influx of cash to fund your remodeling plans. But you should know what to expect before jumping in.

Choose a Loan Type

There are two primary types of home improvement loans—those that use the equity in your home and those that require a down payment. Home loans using home equity as collateral are the most common and offer the biggest loan amounts, according to Greg McBride, senior financial analyst for Bankrate.com. However, “Lenders are looking for homeowners to retain a 15% equity stake after the loan,” McBride said, so you’ll need a fairly large amount of equity in your home just to qualify.

Your other option is to pay a down payment rather than use the equity in your home as collateral. However, McBride warned, “If you don’t want to tie up equity in the home, you’re looking at a much smaller loan with a higher interest rate.

Comparison Shop

When looking for financing, your mortgage lender is an obvious choice, but may not be the best one. “Most borrowers would benefit by shopping around to see where the best terms are,” McBride said. To make sure you are getting the best deal, comparison shop with several lenders, including your mortgage servicer. Requesting a pre-approval or applying for several loans won’t damage your credit—McBride says the credit bureaus lump similar applications into one inquiry – but it will help you to find the lowest interest rate and the best terms.

The Approval Process

To qualify for a home improvement loan, you will need a good credit score and enough monthly income to comfortably pay for all of your debts, including the monthly loan payment. While qualifying for a home improvement loan isn’t as difficult as qualifying for a mortgage, “lenders will be very diligent about verifying debt ratios,” McBride said. So, be prepared to supply a lot of paperwork to prove your financial standing.

If you choose to use the equity in your home as collateral in your loan, the lender will also order an appraisal of your home. The lender will use the appraisal amount and your mortgage terms to determine how much equity you have in your home and what the home is worth to the lender.

Be Wary of Pitfalls

While a home improvement loan can help you accomplish some of your goals as a homeowner, there are a few pitfalls to watch out for:

If you are planning on selling your home in the next few years, a home improvement loan may put a damper on the sale. “The more money you have tied up in loans, the less you’ll be able to take away from a home sale,” McBride said.

If you’re planning to refinance, a home improvement loan may make it more difficult. When you refinance, the lender holding your home improvement loan must agree to “resubordinate” the loan, or “agree to sign off and say they’ll stay second in line,” McBride said. While this is often a formality, he said, if you are in default on your home improvement loan, the the lender may use it as leverage.

Have questions about home loans? Our partner lenders would be happy to assist, call Jersey Shore Realty Group and speak to a real estate professional today!

Courtsey Realtor.com