There are several ways to go about financing for a house renovation project. Typically, you want to make sure that your interest rate or loan rate is average with others. You obviously don't want to pay more than you should, and you also want to be able to afford your current mortgage payments and monthly expenses. It can be very tempting to accept a loan for a higher amount without being able to afford the interest rate. So what kinds of loans are available for you? There are several to pick from and here is a guide to the most common ones.
Open-Ended and Closed-Ended Loans
An open-ended loan means that you can borrow over and over. Credit cards and certain lines of credit are considered to be the most common form of open-ended loan. This means that your total amount can be continuously increased if you promise to be a good customer and make your payments on time. However, if you don't have any available credit, then you can use close-ended loans. Instead, you'll need to borrow more money, but you have to apply for another loan. Common close-ended loans may include mortgages, auto loans and student loans.
Differences Between Secured and Unsecured
Other loans can be broken down into secured or unsecured. Secured loans are ones that rely on assets as collateral for the loan. If you do not pay off the loan and it goes into default, then the lender can take possession of the asset and it to cover the loan. Interest rates for secured loans are lower than those for unsecured loans. The asset may need to be appraised before you can borrow a secured loan.
Unsecured loans do not require any assets for collateral. These are loans that are more difficult to get and will also have a higher interest rate. Unsecured loans look solely at your credit history and income to qualify for a loan. If you default on an unsecured loan, then lender has to exhaust multiple collection options including debt collectors and lawsuits to cover what you owe.
There are a few types of mortgage loans, and one of them is often called a conventional loan. These are loans that aren't insured by a government agency, like the Federal Housing Administration (FHA). Conventional loans may be more accessible as they follow guidelines that are set by the lender.
Types of Loans to Avoid
You should avoid any loans with super high loan rates or adjustable rates that seem to increase every year. Payday are probably the worst type of loans, because these are short-term loans that are borrowed using your next paycheck and have high annual percentage rates that can be difficult to pay off. If you are in a financial crunch, you should definitely consider asking for money from a relative or looking elsewhere before getting a payday loan. Advance-fee loans are also not loans at all. They are simply scams to get money from you and also steal your credit card information.
Current Loan Rates
You can check the current loan rates at various banking institutions or through Bankrate.com.