How Do Zero-Interest Home Improvement Loans Work?

Funding renovation for your house, especially if it is pertaining to structural changes, can exhaust a large sum of money. A home improvement loan paves the way for your refurbishment, but they are expensive. In case of a large borrowing sum, you may have to bear the weight of collateral to be put down. Chances are your budget refuses to afford payments of home renovation loans. Will you put renovation on the back burner? That might not be plausible if it can pose a threat to your safety.

Here come zero-interest home improvement loans. They can effectively finance a large renovation project, including additions. Zero-interest home improvement loans are aimed at rehabilitating your house. It is vital to fix structural issues to make your house accommodating.

Zero-interest home renovation loans are available from your local council or non-profit organizations, not from loan broker. They are called home repair assistance programs and are typically aimed at low-income groups. Such programs are an attempt to help you renovate your house without earning profits in the form of interest.

Important note: It is not the federal government but the local government that offers money under such programs. Any ad claiming “free money” from the government should be considered a scam.

Eligibility for zero-interest home improvement loans

Eligibility conditions may vary by the assisted program you choose. For instance, some programs will let you buy an additional $35,000 for your mortgage to carry out repairs. Some are available nationwide, while others are restricted to a few states only.

• Your income level should be lower than the bare minimum.
• The market value of your house must be lower than a certain limit.
• The renovation should be completed within the given timeframe.

The assisted programs are also available for senior residents and those whose credit histories are not up to snuff and cannot qualify for traditional refurbishment loans.

Find a local organization that offers interest-free home improvement loans. Find out if you are eligible to qualify for an assisted program they are offering. The loan amount will be capped at $18,000. Rarely can anyone get more than $35,000.

How do zero-interest home improvement loans work?

Undoubtedly, you will have to go through endless red tape to qualify for 0% interest home repair loans, but they are worthwhile as you can get a lot of funds and save a considerable size of money.

Note: It is not always the case that you will get 0% interest on these loans. This facility is subject to certain projects like green renovation. However, your county government can subsidize 350 basis points on your loan’s interest rate.

Understand with an example how much it will cost you with and without subsidy.

	With a subsidy	Without a subsidy
Loan amount	$10,000	$10,000
Interest rate	1% (after the subsidy by 350 basis points)	4.5%
Repayment length	5 years	5 years
Monthly Payment	$170.94	$186
Total interest	$256.25	$1,185.81

Now, you can see when you get a subsidized interest rate, your savings will be quite high. They will be even higher if your loan is fully subsidized. Even if you cannot qualify for a subsided loan, you will still save a considerable amount of money compared to that of your standard home improvement loan from a loan broker.

Low-cost home improvement loans are subject to necessary renovation projects. You are not permitted to use this money for any other expenses like paying off debts, vacation, or personal needs. As far as it is about renovation, you cannot carry out:

• Cosmetic improvements
• Installation of luxurious fixtures such as swimming pool, hot tubs and landscaping

They are aimed at rehabilitating the structure of your house, such as:

• Roof leaking. Your life is at risk if you do not get the ceiling repaired.
• Installation of floors
• Fixing plumbing issues
• Plastering, heating and wiring
• Fixing outdated yet necessary issues in the kitchen and bathroom
• Conversion
• Adding on rooms to make it spacious
• Mild extensions

The impact of property value and equity on 0% interest loans

When you take out a home improvement loan, whether secured or unsecured, your broker will lend you money based on the equity you have built in your house. Typically, this equity is up to 80% of its value. However, a zero-interest home improvement loan will allow borrowing based on the projected value of your house after renovation. You cannot get more than the appraised value of your house.

It is likely that you need a larger sum of money, and the county government will put a cap on less than that. You should think of how you can utilize that sum to carry out the most essential renovation.

What are the alternatives to zero-interest home improvement loans?

Technically, there are no best alternatives to zero-interest home improvement loans because the rest of the loans on the market are quite expensive. You can still consider the following options when you fail to meet the criteria for assisted renovation loans.

• Personal loans

Without putting up collateral, you can use personal loans to do up your house. They are particularly fruitful when the borrowing sum is not too large. Bad credit people can also get the nod for them. In fact, you can qualify for bad credit personal loans with guaranteed approval of up to $5,000.

• Home equity loans

Home equity loans are borrowed against the equity you have built in your house. They act like a second mortgage that you will pay down over a number of years. Here is the difference between home equity loans and zero-interest loans:

	Home equity loans	Zero-interest improvement loans
Interest rates	Lower than personal loans	0% or subsidized rates
Eligibility	Home equity and credit score	Your income and projected home value after renovation
Collateral	Secured by house	No security

• Cash-out refinance

Cash-out refinance is a widely available option that allows you to refinance your mortgage for an amount larger than your current outstanding balance. The extra funds can be used to complete renovation projects. You can get them at affordable interest rates. Here is how zero-interest home renovation loans are different from cash-out refinance:

	Cash-out refinance	Zero-interest improvement loans
Interest rate	Lower than your current mortgage	0% or subsidized rates
Eligibility	Depends on home equity value and credit score	Your income and other factors
Loan purpose	Flexible: It can be used to consolidate debts, too	For specific home renovations

What are the upsides and downsides of home repair assistance programs?

Zero-interest home improvement loans have been specifically designed to help people who cannot afford traditional home refurbishment loans. The biggest advantage is they save a lot of money in interest. However, they are subject to a few drawbacks as well.

Benefits	Drawbacks
No interest charges	Limited availability
Assistance to a specific group of people	Stringent criteria
Favorable conditions	Restrictions on usage

The bottom line

Zero-interest home improvement loans involve red tape, so qualifying can be tricky. They are mainly aimed at low-income groups not eligible for traditional home refurbishment loans. Bear in mind that such loans are not always available as they are funded by local government.