Over ninety-one percent of homeowners believe that some kind of renovation, repair, or upgrade is necessary for their homes. Nevertheless, home repair prices increased by 19% in 2022 (according to estimates from the middle of the year), and this trend is expected to continue in 2023. Consequently, a home repair loan could be an option for certain homeowners who are trying to budget for the cost.
The benefits of home improvement loans aren’t without their drawbacks, either. Consider these cons before you take out that home improvement loan to pay for all those repairs, improvements, and renovations.
The security of your home could be at stake.
Homeowners are often required to put up their primary residence as security for various home improvement loans. Secured loans may carry some risk, but they often have lower interest rates than unsecured ones.
In the event that borrowers fail to make payments when due, home improvement loan lenders have the right to pursue collection of past-due principal, interest, and fees. If you have a collateralized home renovation loan, that can lead to foreclosure.
When a foreclosure takes place, the lender effectively seizes the collateralized asset. Consequently, a homeowner runs the risk of losing their house if they are unable to repay a home improvement loan according to the conditions stated in the loan agreement. In addition, a borrower’s credit score might take a major hit after a foreclosure, which reflects poorly on their credit history.
Potentially Exorbitant Interest and Payment Rates
The interest rates on home improvement loans can range from very low to shockingly exorbitant. That’s especially the case with unsecured home improvement loans, such as those for minor adjustments, restorations, or repairs.
Depending on the lender, interest rates for unsecured home renovation loans can range from double digits to well over 30%. Consequently, the monthly payments can end up being too costly for some people to handle. Because a greater principal also implies considerable payments are part of the arrangement, that becomes an especially big deal when a homeowner loans a huge sum.
Home improvement loans also come with a variety of costs. Common administrative charges include origination fees. Closing charges and appraisal fees are sometimes additional expenses associated with home improvement loans, whether they are first or second mortgages. They may have to pay more out of pocket, or the overall amount payable may increase as a result.
An improved credit score could be necessary.
Home improvement loans typically have higher credit score requirements compared to primary mortgages. Some ways to get money for home repairs and upgrades wind up as a new main mortgage (like a cash-out refinance), while others function as secondary mortgages or individual personal loans. Because the lender may be taking on more risk with these, they typically impose stricter borrowing criteria.
The specific credit score needed could differ depending on the kind of loan and the lending institution. The debt-to-income ratio is just one of several additional metrics considered when evaluating an applicant’s application. However, keep in mind that obtaining a home repair loan could be more challenging than getting a regular primary mortgage.
