Weigh These Pros and Cons Before Taking Home Improvement Loans

Pros and Cons of Home Improvement Loans
In the real estate market, better the condition of the property, the more is its market value. Also, a beautifully designed and well-furnished house is certainly very inviting and comfortable. Here, we try to explain the concept of home improvement loans, along with their pros and cons.
WealthHow Staff
Last Updated: May 31, 2018
There are two primary credit-creation facilities in the real estate credit market. The first one is the home or estate loan. These kinds of offerings are usually availed to facilitate purchase of real estate. The second ones are used to renovate and repair real estate, in order to increase its market value; these are known as home improvement loans.

Factors Considered

The home improvement loan is a secured loan that is backed by collateral, and is specifically used to improve the condition of any home, from the perspective of aesthetics, practicality, and even comfort. In the real estate credit market, the collateral is often referred to as a mortgage. The collateral that is to be pledged to the lender is usually the real estate, which is to be improved or renovated. In some cases, it can also be any other possession of the borrower that has a significant monetary value, like a car. The amount, time period, and rate of interest of the loan differ from case to case; they are calculated considering the following factors:
  • Location and Size of the Property: It is one of the most important factors considered for calculation.
  • Credit History: Another very important factor that is considered is the credit history of the applicant. The lenders usually hesitate to approve or sanction a loan of a rather high amount to a home owner, with a poor credit history. Hence, before applying, it is essential to improve the credit history, in order to get suitable terms and conditions.
  • Age and Condition of the Property: The age and current condition of the house is also taken into consideration for sanctioning routines. A historically important property often gets the property owner very favorable terms for the loan. However, it must be noted that it is a long-term loan, and has a lengthy approval procedure.
Pros
  • With the help of this loan, a property or the real estate can be renovated. This renovation makes the home elegant and comfortable. The biggest advantage of applying for it in the long run is that the market value of the property is always on a very high point, on the graph of real estate prices. The life of such an improvised property is also considered to be long.
  • There are many lenders who are willing to offer a variety of terms and conditions for home loans. Hence, it is also possible to avail a huge amount of credit, with a low rate of interest and longer duration.
  • The amount can also be used for renovation, improvement, and an immediate sale of the property. This kind of sale can be done, only if the property is not pledged as collateral.
  • In the long run, it proves to be extremely profitable. It means that the sales price of the property (that is increased as a result of the improvement) significantly exceeds the actual cost of the property.
Cons
  • During fluctuating economic conditions, the rates of interest on the loans shoot up, making the credit costlier. Due to this, most of them do not tend to be productive, or of convenience to applicants.
  • It has a very lengthy approval process. People with a bad credit history find it difficult to avail it.
  • The liquidity of one of the borrower's assets may freeze, as it has to be pledged as collateral to the lender; thus, it is risky to avail it.
It is important to consider all the pros and cons, before actually applying for it. Online calculators are also available, with the help of which, its amount, interest rate, and repayment period can be known.