What is a Home Improvement Loan

A home improvement loan is a loan that allows the borrow to make improvements and additions to their property. Most loans are limited to permanent improvements that will remain with the property; additions, decks, garages, painting, etc. Items that are considered luxuries like a hot tub are not considered, and in many cases a swimming pool is considered a luxury item. The lender may also require that the proper permits are in place before releasing the funds.

The general purpose of a home improvement loan is to finance improvements that will increase the value of your house and property. There are several types of home improvement loans available; a first mortgage, a second mortgage also known as a home equity loan or home equity line of credit, refinancing, unsecured personal loans, and grants.

Most home improvement loans are based upon the mortgage you secured for your home or property. They are usually paid in small increments as the work is completed, for example the loan will be paid as each portion of the overall job is completed. In other cases you may be required to make the initial payments to contractors yourself, and only when showing proof of payments will you be reimbursed for the payments. This guarantees to the lender that the loan is being used for home improvement projects.

You need to be wary of some potential home improvement loan scams. Some fraudulent contractors require that you receive a home improvement loan from a company or lender that he knows. This scam works by the lender requiring that you sign a lot of paperwork before work begins on the improvements, and then more paperwork to continue each stage, and usually on a short to impossible deadline. In many cases this “improvement loan” is actually a home equity line of credit, with extremely high interest rates and fees. The contractor will finish the work hastily, or not finish at all once their money appears.

In other cases the contract/loan agreement has blank spots that the lender promises will be filled in as soon as they receive information from the contractor. The lender may claim that the contractor needs more time to give an accurate estimate on the work. You may later discover that the price quoted was significantly lower than the loan amount, and the entire loan amount has gone to the contractor. You can be overcharged, and receive unprofessional work in return.

A home improvement loan is a great option for some, but you need to be careful in deciding what type of loan to choose.