Homeowners wishing to remodel their kitchens, build an addition or make any other (relatively) small improvements to their home find home equity loans and credit lines to be handy financing options.
Strictly speaking, home improvement loans are technically different from standard second mortgages. Home improvement loans take into account the projected value of the property, after the improvement.
For example, Bill and Hillary need $50,000 to build an addition to their home. Their home is currently worth $400,000 and they have a mortgage of $360,000. As such, they don't have the equity for a simple home equity loan. However, if they take out a home improvement loan, the lender will look at the property's value after the addition. Assuming that the addition adds $40,000 to property, Bill & Hillary's home would be worth $440,000 after the construction. This home improvement loan is much like a construction loan, in that it depends on the value of the completed project. Likewise, the contractor and specs must be pre-approved, and the work must be monitored before final disbursement.
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