There are two primary credit creation facilities in the real estate credit market. The first one is the home loan or the estate loan. These kinds of loans are usually to facilitate purchase of real estate. The second type of loans are the ones that are used to renovate and repair real estate, to increase its market value, these loans are known as home improvement loans.
Factors Affecting Home Improvement Loans
The home improvement loan is basically a secured loan meaning, the loan is backed by a collateral and is specifically used to improve the condition of any home from the point of view of aesthetics, practicality and even comfort. In the real estate credit market, the collateral is many times also referred to as a ‘mortgage’. The collateral that is to be pledged as to the lender is usually the real estate, that 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 home improvement loan differs from case to case. The following factors are considered for calculation of amount, rate of interest and total time period of the loan.
- Location and Size of the Property: The location and size of the property is considered as one of the most important factors that are used to calculate the amount, period and rate of interest of the loan.
- 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 for the home improvement loan it is essential to improve the credit history, 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 home owner very favorable terms for the loan. It must be however noted, that the home improvement loan is a long term loan and has a lengthy approval procedure.
Pros of Home Improvement Loans
- With the help of the home improvement loan, a property or the real estate can be renovated. This renovation, makes the home very pleasant looking and comfortable. The biggest advantage of this loan in the long run, is that the market value of such a 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.
- A huge amount of loan 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 a collateral.
- In the long run, a properly calculated home improvement loan 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 price of the property and the home improvement loan.
Cons of Home Improvement Loans
- During fluctuating economic conditions, the rates of interest on home improvement loans shoot up making the credit costlier. Due to this, the home improvement loan does not tend to be productive or of convenience to the applicant.
- The home improvement loan, has a very lengthy approval process. People with a bad credit history find it difficult to avail such a loan.
- Most of the time, a home improvement loan is a secured loan. The liquidity of one of the borrower’s asset freezes, as it has to be pledged as a collateral to the lender.
It is also very important to consider the pros and cons of all the home improvement loans, before actually applying for one. On line calculators are also available, with the help of which the amount, interest rate and repayment period of the loan can be known.
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