Qualifying for a home equity loan

A: If you have enough equity in your home to cover the loan you need, the state of your renovation project should not be a problem. You are free to use the money from a home equity loan for any purpose. Most lenders will lend you an amount equal to 100 percent of your home value, and some will even lend up to 125 percent if you have a good credit score.

If your renovation is only partially completed when you apply for the loan, however, this could cause difficulties in appraising the house to ascertain its value. This, in turn, could affect the amount of money you are able to borrow. Some lenders offer home improvement loans that allow you to receive the money in stages during the renovation process, based on inspections. This could help solve your problem, although these loans may be hard to find.

Another option is to refinance your first mortgage for a higher amount, and take a cash-out payment to fund your renovation project. If your credit score is lower, you may be able to get more cash to pay for your renovation by refinancing your first mortgage versus adding a home equity loan. When considering this approach, you need to weigh the benefits of getting more cash out versus the change in your total monthly payments and interest rate on your refinance. This is usually worthwhile only if current mortgage rates are close to the rate you have now.

You may still be able to get a home improvement loan if you don’t have enough equity to borrow all the money you need via a home equity loan, depending on your credit rating. However, you may pay a higher interest rate. You may also be able to get enough funds to make up the difference through a personal loan or line of credit. These loans also carry a higher interest rate since they are not secured by your home, and the interest payments are not tax-deductible, like the interest on a home equity loan (consult a tax adviser about your particular situation). However, the set-up fees are usually lower.


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