Loans for Home Improvement: The Best Way to Add Value to Your Home

When it comes to making your dream a reality, it’s easy to get caught up with going through all of the colors, patterns, materials, styles, and the list goes on, but there is one important detail you need to consider that isn’t always so fun.

How Do You Pay for It All?

Depending on what you have in mind, your plans for home improvement can get pretty pricey pretty quickly. Fortunately for you as a homeowner, you can pay for your project with loans for home improvement.

Before we look at your home improvement financing options, let’s talk about the benefits of improving your home along with some of the best investments you can make in the long-term value of your home.

What Are the Benefits of Home Improvement?

Increased Equity

First and foremost, home improvement projects can significantly increase the value of your home. However, it is important to manage your expectations when it comes to the return on your investment.

Home value is regional and variable, and there are many factors that need to be considered when calculating the overall value of a home. Practically speaking, calculating the difference between the total worth of your home before and after the project is finished is the only accurate approach to assess your rate of return on your home improvement project. 

With that being said, there are certain home improvement projects whose return can be calculated accurately without requiring a home appraisal, but we will discuss some of those later on in the article.

We may use a straightforward equation to get the percentage of your return in order to assess your return on investment. All we need to do is divide the net return by the total investment.

For example, let’s imagine you were to spend 50 thousand on your home improvement project, and the total appreciation of your home comes out to 40 thousand. In this case, we would divide 40 by 50, which would give us an 80% return on investment.

It’s very rare to get a 100% return on investment when it comes to home improvement projects, but there are plenty of things you can do to get closer to that kind of return. You could do the demolition part yourself, reuse any materials that are still suitable for your project, and pitch in wherever you can cut down on labor costs.

Improved Quality of Life

Another important factor to consider is the value that your home improvement will add to your living environment. Although a home renovation may cost more than the equity it will add to your house, it’s still worth it because it can improve your quality of living.

If you’re short on bedrooms and storage spaces, or if your kitchen’s layout makes cooking difficult, a home improvement project can increase the functionality of your home and make it more enjoyable to live in.

Furthermore, renovating your home gives you a chance to add your personal touch to its appearance. Feeling good about the space you live in can be one of the most important factors for homeowners, especially if they are planning to keep the home long-term.

Long Term Savings

Many home improvement projects can save you money in the long run by making your home more energy efficient, and this is especially true if you live in an area with extreme weather conditions throughout the year.

For example, switching from single-pane to double-pane windows can save anywhere from $126 to $465 per year. Windows, roofs, and doors are the best examples of energy wasters in a home, but you will also see savings when you replace your flooring and switch your appliances for more energy-efficient models.

What Are the Best Home Improvements to Add Value?

If adding value is your primary goal for improving your home, then it’s important to know what kinds of improvements will yield the highest returns. Here are some of the top renovations to consider for increasing your resale value.

 

Finish Your Basement or Attic

Adding liveable square footage to a house is one of the best ways to boost your home’s price tag. One of the biggest factors for calculating the value of a home is its square footage, which is why you’ll often see “finished basement” listed among a house’s main selling points.

Finishing every area of your home allows you to add bedrooms and bathrooms, create extra closets for storage, make a game room for your ping pong table, or add a home office. These are all extremely valuable additions for marketing a home, and they could be the sticking point that determines whether or not you get an offer.

If you are not planning to sell but you still want to finish your basement or attic to add liveable space to your house, you can rest assured that you are still making a worthwhile investment. You can typically expect to reap about a 70% increase on your basement or attic remodeling project, and when you consider the overall increased functionality of your home, the 30% is almost always worthwhile.

Redo Your Kitchen

In American homes, kitchens are often one of the main hangouts for families. Having an open space that is bright and inviting makes a huge difference in how potential buyers perceive your home.

Since we spend so much time in our kitchens, it’s important that these areas are not only attractive but functional. Redoing your kitchen allows you to create more surface area for preparing meals, add more storage space for food and utensils, and design a more intuitive and practical layout.

Depending on the scope of the project, your return on a kitchen makeover will vary, but as a general guideline, the bigger the investment, the lower your rate of return will be. Return on investment for kitchen remodels typically ranges from around 50% to 80%.

Update Your Exterior

If you are a homeowner, then you know the value of curb appeal. Since most buyers start their shopping experience online, having an updated and modern exterior will likely determine whether shoppers call to schedule a viewing or just keep scrolling.

Although it is difficult to determine an exact percentage when it comes to calculating the added value of an updated exterior, it is well-known that curb appeal sells homes faster. Banks and financial institutions calculate a home’s value mostly based on square footage and functionality, but curb appeal is all about increasing the “perceived” value of your home.

When updating your home’s outward appearance, you need to consider siding, roofing, windows, and landscaping. Even if your house has “good bones,” giving it a makeover and a new haircut could allow you to add some digits to your listing price.

The numbers for exterior remodeling can vary greatly, depending on the materials you use and what you plan to upgrade. For example, vinyl siding can yield an ROI of nearly 70%, which is more or less the average return you can expect from any type of home improvement.

On the other hand, adding a new roof to your home is considered to have one of the highest returns of any home improvement investment project. In 2019, a study conducted by the National Association of Realtors found that a new roof could actually increase the value of the home by more than the initial investment, yielding a return of 107% on average. This makes roofing one of the most sound investments for homeowners who are considering selling in the near future.

Another great investment for your home’s exterior is a new garage door, which was found to have a return of around 95% in the same study we mentioned before.

Keep in mind that these returns are based on national averages, and they will not always be consistent for homes in every area of the country. If you are considering updating your home’s exterior in order to help it sell, it’s a good idea to do some research beforehand and consult with a realtor who is familiar with the housing market in your area.

Financing Home Improvement Projects

So now that we have gone over some of the benefits of home improvement let’s talk about some of your options for financing.

Paying Up Front

Owing money is never fun, which is why paying for your home improvement project upfront may seem like an attractive option for many homeowners. When you pay for your home improvement project in cash, you can avoid adding a payment or increasing your monthly payment for your home. This allows you to keep your monthly budget intact and have peace of mind knowing everything is paid for.

So besides avoiding an extra or increased monthly payment for your project, what’s the upside of paying for your project in cash?

• No interest: This benefit is pretty self-explanatory. When you finance your project with loans for home improvement, you will be responsible for paying back the principal amount plus interest, so paying in cash will almost always save you money in the long run.
• Instant equity: Another added benefit of paying cash for your home improvement project is the equity you will be building into your home’s value. As soon as your project is finished, the value of your home can increase substantially.

• Negotiating Power: Paying for your home improvement project with cash could add some leverage to your ability to negotiate with vendors and contractors. Because cash payments eliminate the need for financing, it also reduces certain risks and administrative burdens that would fall on the contractor.

Because you have funds readily available, you will be able to execute your plans any way you see fit, without oversight from a lender who might be basing their loan amount on the perceived value of the completed project.

Since paying upfront can save time and effort for your contractor, they may be willing to work out special cash discounts, establish better terms for your contract, and move the start date up to get the project rolling.

Another no-brainer is performing a credit check, but when you pay upfront for home improvement, you won’t need to worry about your credit score getting dinged.

One hard credit check can lower your credit score by as much as ten points, and subsequent credit checks can lower your score by an additional five points. If you are considering taking out loans for home improvement, then you may want to shop around a bit for the best option.

This means that you will need to have your credit checked by multiple lenders, and each credit check will stay on your official credit report for two years.

Paying upfront for a home remodeling project comes with several benefits, but the reality is that it may not always be feasible for everyone to pay out of pocket. Home remodeling can easily run into the tens of thousands with materials and labor, and not everyone has the savings to cover it.

And even if you do have funds to cover it, you’re probably not in a hurry to drain your bank account. So if paying upfront isn’t the right choice for you, then what’s the best loan for home improvement for you?

Home Equity Loans

Home equity loans for home improvement are loans borrowed against the equity you have built up in your home. If you are reading this article, then you probably already know what equity is, but we will go ahead and explain this term just in case.

Having equity in your home essentially means that the home is worth more than you owe on your mortgage. This is calculated by subtracting the amount left on the mortgage from the home’s fair market value, so the longer you have been paying, the more equity you will have.

If you are considering home equity loans for home improvement, these might be a good choice for you if you have built up significant equity in your home. Here are some of the benefits of equity loans for home improvement:

• Quick Access: When you apply for a home equity loan for home improvement from a local bank, you can often be approved and have the funds available to you within just a few weeks. Since you are borrowing against the portion of the home’s value that you own unencumbered, there is a hard asset securing the money that is being borrowed.

• Amortized: Home equity loans for home improvement are a type of amortized loan, which means that the principal amount and interest will be split up over a certain number of years, and once the payments are complete, the loan is finished.

What’s great about an amortized loan is that you will have a single monthly payment that will always be the same, which allows you to budget and plan for your future more accurately.

• Access to Significant Funds: A home equity loan for home improvements will typically give you the ability to borrow up to 80% of your home’s total equity. Although it is possible to borrow a higher percentage of your equity, this will often come with a more stringent qualification process and higher interest rates.

• Fixed Interest Rates: Equity loans for home improvement will almost always have fixed interest rates throughout the lifetime of the loan, which means that the best time to borrow is when interest rates are low.

While interest rates are influenced by the current market conditions and economic landscape, there are several other personal factors that will be considered by the lender to determine rates for home equity loans for home improvement. These can include your credit score, debt to income ratio, and the amount of the loan.

Home Equity Line of Credit

Home equity lines of credit, also known as HELOCs, can also be a good option for those who want to finance their home improvement projects. To understand how a HELOC works, it’s important to note how they are different from home equity loans for home improvement.

While a home equity loan has a fixed interest rate and a predetermined amortization schedule, a HELOC has variable interest rates and allows for more flexible repayment options. If they are used responsibly, HELOCs can be great financing options for homeowners during their remodeling projects.

• Revolving Funds: Unlike a home equity loan for home improvement, HELOC funds can be spent, repaid, and re-spent. You can think of this much like you would a credit card. Once you pay off your balance, you can then reuse the available funds.

Keep in mind that when you spend these funds, you will start to incur interest as you would with any type of loan, and you must pay down your balance for the funds to become available again.

• Variable Interest Rates: Variable interest rates can be a double-edged sword since they rise and fall with the trends of the market. However, if you use your funds wisely, you can plan to spend and repay them while rates are low.

If rates go up, you can choose to freeze your spending and continue paying off your line of credit. If you decide to stop using the funds, they will remain available for as long as you keep the account open, even once the funds are paid off.

• Ease of Use: One aspect of HELOCs that makes them attractive to borrowers is their flexibility and ease of use. HELOCs are linked to your checking account, allowing you utilize the debit card and checkbook you already have in your possession. This makes the funds readily available, and they can be spent anywhere.

The funds from your HELOC can also be used “as needed” without any set schedule or oversight from your financial institution.

Home Renovation Loans

Home renovation loans are another great option that many homeowners like to work with because these are specially designed-loans for home improvement. However, because of the nature of these kinds of loans for home improvement, they typically come with some additional oversight from your financial institution.

Home renovation loans allow you to borrow against the projected value of your home after the renovation is complete rather than its current value. This gives you greater borrowing power, but this also explains why lenders have more say-so in how that the funds are dispersed.

Most contractors have experience working with these kinds of loans for home improvement, so they should be able to provide your lender with all of the necessary documentation and information to ensure that the loan is being used appropriately.

Here are some benefits that come with this type of loan for home improvement:

• Customizable Terms: Loans for home improvement will oftentimes have more flexible repayment terms. Whether you prefer a higher payment to reduce interest and pay the loan off more quickly, or if you would rather have a lower monthly payment and fulfill the loan over a longer period of time, loans for home improvement will have options that work for your budget.

• Assistance from the Lender: Because lenders who work with loans for home improvement will often be involved in the process, they can usually put you in touch with a network of preferred contractors.

This can make the entire process run much more smoothly since these contractors will know what the lender’s requirements are, and they will often already have an established relationship with the financial institution.

Before choosing any type of loan for home improvement, it is always best to contact a local financial institution to discuss your upcoming project and see what kinds of loan products will work best for your specific needs.

Farmers Bank Loans for Home Improvement

Farmers Bank has been servicing the financial needs of South Central Idahoans for over a hundred years. With our six convenient locations, we are happy to meet with residents of Buhl, Wendell, Jerome, Twin Falls, and surrounding areas to discuss loans for home improvement.

We offer several different kinds of financing and loan products, so if you’re shopping around for loans for home improvement, give us a call to set up an appointment with one of our knowledgeable loan officers. Click here to find a location near you!