Understanding Secured Home Improvement Loan Terms

Secured home improvement loans are given to home owners with collateral to post in order to receive financing. The collateral may be any asset, such as a car or business, but in most cases it is the home equity itself. Not all secured loans are good deals, and there are several terms that will affect the quality of the loan overall.

Interest Rate

The lender takes on very little risk in the case of a secured home improvement loan. The loans will be much cheaper than with unsecured loans because the borrower is assuming all of the risk. Interest rates will be affected by the borrowers credit score, but they will be less affected with a secured home improvement loan than with an unsecured loan. Opt for a fixed-rate loan where possible so your payments will never increase. Adjustable rate loans will put you at risk for losing your home if the rates climb too high.

Monthly Payments & Length of the Loan

The length of your loan and the interest rate applied will determine your monthly payments. Opting for longer loans will typically decrease your monthly payment but raise your interest rate. Remember: as the value of your home increases with the improvements, your property taxes may increase at your next assessment. Because you are taking a loan to improve the resale value of your home, you should look for a loan that will mature before you sell the home.

Assessed Value of Collateral

You will need an assessment to determine the accurate value of your collateral. In the case of collateralizing a home, the lender may have an approved list of real estate appraisers. If you are using someone from this list, get an independent appraisal as well. The value your home appraises for will determine the amount you are eligible for with a secured home improvement loan. Take charge of the process so you will have access to the full amount you are eligible for based on your home equity.

Terms of Collateral

Be sure you understand the conditions under which your collateral may be seized. Can it be seized if you are 30 days late on a payment? If you have not made a complete payment in 90 days? Knowing these terms will protect you in the case you cannot make your monthly payments. In some cases, as long as you are making partial payments, the asset cannot be seized. In others, your asset will be seized aggressively if you are even 30 days late. You should look for a loan with a degree of flexibility in this clause. Be sure it is in writing that you must be notified well in advance of any potential seizing of the assets.

Penalties and Fees

Ensure you understand the fees for paying off the loan early, refinancing, moving, etc., prior to the life of the home improvement loan. These fees may not seem as important as the interest rate up front. However, as you move forward with the improvements, things may come up that necessitate a change in plans. Protect yourself by discussing any penalties in advance of signing a contract.