Good Time for A Home Improvement Loan?

Thinking about a home improvement project? With carpenters and other skilled trades hungry for work, and mortgage interest rates their lowest in decades, it looks like a great time to tackle a major home renovation. The major problem is, can you get a home equity loan to fund it?

The irony is that even as mortgage interest rates have dropped right through the floor this year, credit has gotten much harder to come by. With the steep drop in property values, many homeowners have seen their home equity lines of credit cancelled or severely cut back. And those who can get loans can expect to pay more than they would just a few years ago for a home equity loan.

The good news is that labor costs have dropped as contractors and others have seen less demand for their services. If you bid a job out competitively, you can save anywhere from 10 to 20 percent off the cost of a major home improvement project like a room addition, new bathroom or new deck compared to what you would have paid just three years ago, depending on where you live.

Be aware, though, that prices or materials and supplies have held fairly steady, limiting the savings you can expect on a project, particularly if you're planning to do some or all of the work yourself.

Qualifying for a home equity loan

However, the big challenge on any home improvement project these days is whether you can get a home equity loan or line of credit to finance it. Due to falling home prices and related declines in home equity, many lenders are cancelling existing home equity lines of credit. If you're looking to take out a new home equity loan, you may be out of luck unless your total equity is at least 20 to 50 percent of your current home value.

The great deals on home equity interest rates are pretty much a thing of the past, although good rates are still available, due to the current low rates on home loans in general. Whereas borrowers with good credit used to be able to get away with paying only a half a percent over the prime rate, these days home equity loans typically run two percent or more above prime. However, with the prime rate currently running about 3.25 percent, those who qualify can still get a home equity loan for just a bit above what they'd pay for a 30-year loan.

You'll probably have better luck if you live in an area where prices have been relatively stable or have not declined precipitously over the past three years. Homeowners in places like Miami, Phoenix and Las Vegas, where prices have dropped up to 50 percent from the peak of the market, will likely find it challenging to get a home equity loan no matter how much equity they still have in their property. But if you live in a less volatile market, your chances are greatly improved.