With home improvement season in full swing, it’s likely you’re feeling the impact of inflation on your budget as you research materials and contractors. And if you’re like the nine out of ten homeowners A survey from Today’s Homeowners who said they have a project planned for 2023 makes a home improvement loan seem like the best option.
But is now the best time to get a home improvement loan? Due to high interest rates and current inflation, the answer will look different for everyone, but most should be cautious.
Why it might not be the best time to take out a home improvement loan
While all forms of debt – especially home improvement loans – aren’t inherently bad, there are reasons why you might want to explore other options before turning directly to a lender to get the money you need.
A home improvement loan is essentially an unsecured personal loan and is different from a home equity product; The equity in your home is not used and none of your assets are required as collateral. While this may seem like a desirable option to some, personal loans should be carefully considered given today’s high interest rates.
Interest rates have reached historic levels in 2023. In an effort to cool the bloated economy, the Federal Reserve has raised interest rates a total of eleven times between 2023 and 2023. While personal loan rates are not directly tied to the Fed rate, interest rates have also been affected, with rates averaging more than 11 percent in August 2023.
When will interest rates on home improvement loans drop?
Although the Fed has slowed the pace of rate increases, it has indicated that more rate hikes will occur in 2023. Although little is known about what interest rates could look like for the rest of 2023, we do know that interest rates will not fall anytime soon. soon, and there is no definitive answer to when they will start to decline.
“Based on the Fed’s behavior, it is possible that rates will start to decline in the second half of 2023,” said Joseph Catanzaro, a financial advisor at Oak and Stone Capital Advisors.
“However, it is important to remember that Fed policy is constantly evolving, so it is impossible to say with certainty when rates will fall,” he adds.
When a renovation loan is worth considering
Due to the costs of high mortgage interest rates, small, functional renovations and projects are encouraged instead of selling and moving now. Plus, improvements that fit well within your budget and are guaranteed to increase your home’s value are never a bad idea.
Catanzaro recommends that borrowers assess their financial stability before seeking a loan. “If you have a stable income and good credit, you are more likely to get a favorable loan,” he says. He also urged borrowers to consider the urgency of the renovations, suggesting it could be a good time to borrow if the project is essential or could prevent major problems down the road.
If you meet the following criteria and don’t want to tap into the equity in your home, then it may be worth taking out a personal loan to finance your next project.
- You have good to excellent credit.
- You are prequalified for multiple loans and offered competitive rates.
- No origination fees will be charged.
- The project is on the small side and does not require a large loan.
- The return on investment is high.
- You are more than confident that you can meet the monthly payments.
- You have a clear credit report with a positive, developed repayment history.
How to find a home improvement loan
While some lenders offer loans specifically designed for home improvements, most banks, credit unions and online lenders offer personal loans that can be used for renovations.
Most online lenders allow borrowers to use the money for almost all legal costs. However, some have usage restrictions, so always read the terms and conditions before signing up or call customer service to ensure you can use the loan for home projects.
Once you find lenders that meet your needs, pre-qualify with at least three companies to ensure you’re offered a competitive rate. Prequalification allows you to check your predicted rates and fees without impacting your credit score. Once your offers come in, you can compare to find the lowest interest rate.
Before you sign on the dotted line, make sure you’ve reviewed your entire portfolio of options, especially with your current bank or credit union. Some institutions offer exclusive benefits or discounts to members, such as interest rate reductions and repayment flexibility.
Alternatives to a home improvement loan
Depending on the scope of your next project, there are a number of alternative financing options you can explore before jumping straight to a loan.
Pay in cash
For those with a smaller project and savings, this is the best way to pay. There is no interest, no monthly payments and no fees. However, this is not feasible for most borrowers looking to make large-scale changes. For those looking to make a minor update to their home, paying cash is ideal.
If you are strapped for cash and there is no immediate need to get the job done, calculate how long it will take to build up your savings to reach the total cost and, if possible, allocate a little extra each month to the renovation. fund to prevent you from taking out a high-interest loan.
Borrow from relatives or friends
While this is not the first option for most borrowers, it is important to use this method when the opportunity presents itself. Ask close and trusted friends or family members to lend you the money, with the understanding that you will repay the loan in full within a specified time frame.
0 percent APR credit card
While it does mean taking on more debt, it may be wise to look at credit cards that offer a 0 percent APR period, especially if your project is smaller.
0 percent cards offer an introductory period – usually between 12 and 24 months – during which no interest accrues. If you can feasibly pay off the balance within the introductory period, you could potentially save thousands in interest.
It is only recommended to request this method if you are 100 percent sure that you can pay off the balance. After the introductory period is over, you will likely face an interest rate that will be much higher than what you would get with a personal loan.
Government-sponsored renovation loans
Although still technically a loan, some government-backed home improvement loans are offered to those who qualify and charge an interest rate of just one percent.
Eligibility and assistance levels vary depending on the loan, but qualifications are based on a number of factors, including but not limited to:
- Where you live.
- The type of home for which you want to use the loan.
- Your income level.
- Your age.
In addition to the need-based federal loans, there are also need-based loans available through state or provincial government programs.
