Imagine the scenario: you’re ready to buy your first house. But you don’t have the cash lying around to buy your dream house, so you decide to settle on a fixer-upper that you’ll spend your free time turning into the perfect home. If you’ve been through the home buying process this already, then you probably remember this quite well. In fact, buying a fixer upper in need of major TLC is a rite of passage for many homeowners. Tons of first homes need work done like re-painting, deck repair, all new floors and wallpaper or an extra bathroom.
Of course the problem is that most first time home buyers simply don’t have the funds to pay for these home improvements after closing on their mortgage. So they go into a do-it-yourself mode. Sometimes they use home improvement loans to help pay for the work. Other times they do all the work on nights and weekends. Maybe the financing comes from credit cards. Sometimes, it’s all one terrible experience. This begs the question: Why do home improvement loans suck?
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- They take too much time. From the bidding process for the work, to the actual upgrades and construction to moving day, it can be very time-consuming. Many borrowers say closing a home improvement loan takes more than 3 months, and might never even close. An efficient lender who understands the home improvement loan process should be able to get your loan closed in a little more than a month. Sometimes even less time than that.
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- Renovation mortgages are too much work. Yes this option will take more paperwork. After all, the bid process alone can add a lot of extra work to the process. However, working with an experienced mortgage consultant will help you avoid the extra work, requiring mostly just extra signatures.
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- No one understands programs like FHA 203k or HomePath Renovation. It’s true that many real estate agents haven’t heard about some of the options for financing upgrades. Many deals die because the buyer sees a house they like but there may be a few things they’d like to change. The challenge to home improvement loans lies with the effort to help educate real estate professionals and buyers alike.
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- Do it yourself work is a real pain. Putting in a new kitchen takes time and skill, and doing all on your own isn’t likely something you want to do. Same with a bathroom, wider hallways for wheelchair access or painting the entire house. Again, it’s not something you may want to do, and that’s okay. Home improvement loans are generally for paying a professional to do the work. They’re not really for the DIY crowd.
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- Buying a new home is easier than buying a fixer-upper. This is certainly true in many cases, but it’s not always feasible. And with so many homes on the market today under the foreclosure cloud, you can actually find a great deal on a fixer-upper and roll the cost of the repairs right into the monthly payment! Plus, older houses have more character than subdivision cookie-cutters.
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- They are expensive. Home improvement loans generally come with a little higher interest rate, it’s true. Interest rates are based in part on risk. Paying for home improvements can be risky, as the after-improved value is used to predict the future worth of the house. But the difference between a home improvement loan and a regular mortgage is pretty low. It’s definitely lower than the cost of financing the work and materials on a credit card!
- Store credit is so much easier to get. Again, this may be true, but you’ll pay a much higher rate than a home improvement loan and you’ll have to do the work yourself. If that’s your goal, then a home improvement loan isn’t for you.
Home improvement loans are definitely not for everyone. There’s no doubt that they take a little extra time and work. Sometimes you can find a newer home that needs less work for a good price. And that’s okay. Go for it. But if you find a home that’s average and needs your personal touch with a few upgrades and renovations, then a home improvement loan just may be your next step. Good luck in the house hunting, and let us know if there’s some way we can help!