The Perils of Home Improvement Loans

A Home Buying Article Contributed by Robert Scalia

What's the Big Deal about Jumping into a Home Improvement Loan?

Home improvement loans are an attractive borrowing tool for many people. After all, the interest is tax deductible, the rates are usually lower than those associated with other types of loans and they"re relatively easy to obtain.

But there are plenty of downside when it comes to taking out a home equity loan, so it doesn't hurt to know what you're getting into before it's too late.

How Does a Home Improvement Loan Work Exactly?

With any home improvement loan or line of credit, you can borrow up to 80 per cent of the equity in your home. If your home is valued at $125,000, just to give you an example, and your mortgage balance is $50,000, you could borrow as much as $60,000.

What are Some of the Dangers Associated with Taking out a Home Improvement Loan?

Home improvement loans should not be taken lightly. Keep in mind that you're putting your home up as collateral against this loan. That carries with it some pretty grave consequences. If you fall behind on the payments, you could actually lose your home through what's known as foreclosure. That's where the lender takes ownership of the property and sells it in an attempt to recoup the money they lent you.

Because most people take out home improvement loans with the intention of increasing the value of their home in the long run, the idea of not being able to make the monthly payments is something that usually doesn't cross their minds. But it's definitely something you ought to think about beforehand.

Because home owners count on their house appreciating over time, the expense associated with a home improvement loan is justified. But if they owe more than the house is worth, than they will be "upside down" on their loan.

Being "upside down" on your loan means that you owe more than your home is worth.If you try to sell your home in this situation, you will incur losses that you will then have to pay for out of your own pocket when it comes time to closing the mortgage.

Remember, just because you have equity in your home, it doesn't automatically mean that you can afford the monthly payments of a home improvement loan. You want to very sure that your home improvement loan payments fit comfortably into your budget.

But you should also take comfort in the fact that home improvements will almost always increase the value of your home. There are several, such as adding a swimming pool, that don't usually increase the value upon resale and are almost always sold separately. Others, such as additional bathrooms, living space, renovated or updated kitchens, generally do increase the value of your home.

So before you commit to a home improvement loan, you might want to double check with a mortgage specialist to make sure the renovations that you have planned will increase the value of your home in the end.