A home equity loan is one way to finance a home remodeling project, and it's helpful to conduct some research on rates and the process of applying for a home equity loan before taking the plunge. A home equity loan is just one way to finance a home remodeling project. Here are the details you need to know before you submit an application to your lender.
What is a Home Equity Loan?
A home equity loan is one type of second mortgage where a homeowner takes out a loan that is paid in addition to the original mortgage on the house. The loan amount is based on the equity a homeowner has in the property. The equity a homeowner has in the home usually increases over time as payments are made on the mortgage, and as the value of the home rises.
Nerd Wallet has a helpful paragraph on why a home equity loan might be the best option for financing a home remodeling project:
"Consider a home equity loan if you want to make home improvements that increase value, or to save money by consolidating high-interest debt. Large expenses that can't be paid another way, like a child's college tuition or unexpected medical bills, are also reasons you may consider a home equity loan."
A home equity loan may, in fact, be the best option for a homeowner who has poor credit because the loan is based on collateral – the property – rather than just the credit rating of the application.
However, it's important for homeowners to ensure their credit rating is as good as possible before actually applying for the loan since a poor credit rating can mean a higher interest rate and a higher overall cost for a project than if the homeowner's credit was good.
Consider: The primary alternative to a home equity loan is a home equity line of credit, which is similar to a home equity loan in that the amount that a homeowner can borrow is based on the equity within the home.
Preparing Your Credit for a Home Equity Loan
Like any credit application, a home equity loan application will see the lender inspect the applicant's credit history to determine the appropriate interest rate. A modest increase in the applicant's credit rating could mean thousands of dollars in savings on an impressively sized home equity loan.
Some simple steps a homeowner can take before applying for a home equity loan include making sure there are no mistakes on the credit report, ensuring all accounts are paid on time and are up-to-date in their payments, and reducing balances on credit cards and revolving credit accounts.
Tip: When applying for a home equity loan, it's often possible to secure the best rate by shopping around for a loan. You can apply for multiple loans in a single month, and you won't be penalized for your credit score as long as those applications are within a few days or a few weeks of one another.
At the very least, it's a good idea to check your credit before applying for a home equity loan. Even if you're sure that you've never made any late payments and that your revolving credit balances are low, you'll still want to examine your credit report for possible mistakes and issues that need clearing before you apply for home remodeling financing.
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