A Guide For Home Improvement Loans
February 12, 2024 9-minute read
Author: Scott Steinberg
Home improvement loans are a common way to finance property upgrades, repairs and enhancements. That’s because loans for home improvements of all kinds offer ready access to funds that can help you pay for all sorts of helpful real estate projects and enrichments.
Wondering how to get a home improvement loan, what loans are available to you and how to secure financing options as a borrower? Let’s explore how home improvement loans work, the types of renovation projects they can be put toward and how to go about obtaining them.
What Is A Home Improvement Loan?
A home improvement loan is designed to help you pay for any major home expenses or home improvement projects that need tackling. Using one, you can fund a wide range of efforts from full-scale renovations to remodeling a single room. Funds obtained in this fashion can also be leveraged to pay for necessities that enhance your quality of life such as repairing a leaky old roof, replacing an outdated HVAC or fixing a damaged plumbing system.
If you’re a property owner, you’ll know that fixing up, repairing or remodeling a house is often a costly undertaking. In fact, associated expenses can quickly run up to four- or even five-figure bills. At the same time though, certain home upgrades and enhancements have the potential to pay off as good home investments. Strategic home improvements, like adding a new deck, renovating an old property, putting in marble countertops or kitchen floors can potentially increase the value of your home.
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How Do Home Improvement Loans Work?
As you start to review and research home improvement loan options, you’ll realize that personal loans are a top choice for millions of property owners annually. That’s because you can use a personal loan to fund virtually any type of home improvement project that springs to mind.
Should you opt for a personal loan, it’s important to note that it can be financed with unsecured or secured debt. If you’d like to obtain a personal loan to fix up your house, you’ll also find that the process of applying for one is quite simple and straightforward. Once you complete the loan application and receive your instant offer, you can typically receive your funds within a day. After you receive the cash, you can then use it to fund various home improvements. Under the terms of a personal loan, you’ll make regular monthly payments to your lender for the duration of the loan term.
It’s also important to note that personal loans aren’t your only option when it comes to home improvement loans either. The potential alternatives to pick from include home equity loans, cash-out refinances, or home equity lines of credit.
5 Types Of Home Improvement Loans
As touched on above, various types of different home improvement loans are available to help you fund repairs, upgrades and home improvement projects of all kinds.
1. Personal Loans
A personal loan is a loan that can generally be utilized to fund any type of expense, including home improvements. Because it’s an unsecured debt, its fulfillment isn’t tied to the value of your home, which provides a useful benefit for homeowners.
Under the terms of a personal loan, you’ll make regular monthly payments which go toward paying off your balance and paying interest charges. If you have a good credit score (640 or above), then a personal loan could be the right fit for you. Although you may face higher interest rates and shorter repayment terms than under alternative loan options, you won’t put a lien on your home by signing up for one.
Need extra cash for home improvement?
Use your home equity for a cash-out refinance.
2. Cash-Out Refinance
A cash-out refinance allows you to tap into your home equity to fund various home improvement projects or plans. Think of it this way: Over time, while holding a mortgage, you build up equity in your home, and this equity tends to accrue over an extended period as it grows with every mortgage payment that you make. Using a cash-out refinance, you can leverage the value that you’ve built in your property to receive cash in exchange for taking on a bigger mortgage that replaces the original mortgage.
For example, let’s say you’ve built up $75,000 in equity in a home but still owe $100,000. You want to make $20,000 in renovations. Utilizing a cash-out refinance, you could pull $20,000 out of your equity in the property and refinance to a new mortgage with a $120,000 balance.
Cash-out refinancing often offers the lowest interest of all home improvement loans. You may also qualify for an income tax deduction because you’re using your loan to fix your house. Cash-out refinancing can be a good option if you’re looking for a way to finance home improvements without adding a separate monthly payment to your budget.
3. Home Equity Loan
A home equity loan provides another helpful option if you’re looking to fund home improvement projects. You may also hear this form of home improvement loan referred to as a second mortgage. Put simply, a home equity loan allows you to tap into the equity that you’ve built up in your home over time by using this equity as collateral for a new loan, without refinancing your current loan.
For those who’ve managed to build up a substantial amount of equity in their properties, a home equity loan could be the right solution for you. However, be advised that these types of home improvement loans are often associated with higher interest rates as well. Additionally, a home equity loan will add another monthly payment to your budget. Keep this in mind before moving forward with this option.
4. Home Equity Line Of Credit (HELOC)
A home equity line of credit, or HELOC for short, allows homeowners to borrow money against the amount of equity that they’ve built up in their real estate holdings. As with other types of home improvement loans, you can utilize it to fund various home repairs and upgrades. If you choose to take out a home equity line of credit, you’re essentially taking out a type of second mortgage.
If you’re interested in obtaining a HELOC, you’ll apply to tap into your home’s equity. Should you be approved, you’ll then be given a draw period (10 years, for example) within which to pull out the money that you need on an as-needed basis. At the end of the draw period, you’ll then enter the repayment period of the HELOC, at which time you’re required to make monthly payments. As a secured line of credit, you’ll be adding a second mortgage to your property when you agree to one and will be placing your home at risk if you are unable to keep current with monthly payments.
5. FHA Rehab Loan
Alternatively, as a homeowner, an FHA rehab loan can help you fund home improvement projects by bundling your mortgage and home improvement costs into a single loan. Under this form of loan from the Federal Housing Administration (FHA), homeowners don’t have to apply for two separate loans or pay closing costs twice. Rather, they finance their purchase and home improvements together in a single effort with help from their financial lender.
Which Type Of Home Improvement Loan Is Right For You?
As you go about considering home improvement loan options, and which type of home improvement loan (if any) is right for you, take time to research, consider and explore all your options. As loan eligibility, terms and conditions, and requirements also vary by individual loan type and lender, it’s also important to do some upfront planning and homework, and shop around for the best fit. Ultimately, it’s up to you to consider and review your personal circumstances to determine which loan is right for your budget and your current financial situation.
For example, you’ll want to begin by making sure that the loan terms that you’re being offered actually fit your financial situation. If you have a great credit score and minimal equity built up in your home, then a personal loan, despite its higher rates than alternative options, might be the best financing choice to help you fund your home improvement projects. On the flip side, if you’ve instead already built up a substantial amount of equity in your home, then a cash-out refinance or home equity loan could be the better option.
In many ways, the specific type of home improvement project that you are seeking to tackle will also have a large impact on what the right loan type will be for you. For instance, if you’ve pinned down a relatively fixed budget on a single big-ticket purchase, like a roof repair or kitchen upgrade, then a one-time personal loan or cash-out refinance could be a good fit. But if your budget is more variable and may change based on what you find behind your walls or underneath the bathroom tile, then a HELOC could provide the flexibility you might need.
Understanding Home Improvement Loan Rates When Choosing A Loan
Also, be advised that home improvement loan rates will vary based on your individual financial circumstances and background. Lenders will consider your credit score, income and other details to provide a rate. If you have a “good” credit score and low debt-to-income ratio, then you’ll likely receive a lower interest rate and more loan choices. But borrowers with lower credit scores will likely face higher interest rates and more limited loan options.
In addition, also take note that different types of home improvement loans will have different interest rates attached to them. For example, a cash-out refinance is less risky for a lender and this differential will be reflected in a lower interest rate. But an unsecured personal loan comes with more risk for your lender, which will be reflected in a higher interest rate instead.
Under any circumstance, make a point to set aside time to research and review your options and ensure that the monthly loan payments and financing terms fit into your budget. The last thing that you want as a real estate borrower is to take out a loan that you can’t afford to repay.
Ways To Use A Home Improvement Loan
There are many different ways homeowners can use a home improvement loan. Here’s a brief list:
- A new roof
- New furniture
- Adding or updating rooms
- Building a new garage
- Installing a home addition
- Funding a DIY renovation or overhaul
- Kitchen and bath upgrades
Pros And Cons Of Home Improvement Loans
As with any form of real estate financing, there are advantages and disadvantages to utilizing home improvement loans.
- They’re able to fund a variety of home upgrades, repairs, and improvement projects.
- Home improvement loans provide different ways for individuals and families to obtain financing quickly and efficiently.
- Many options are available to fit your individual budget and financial circumstances.
- They’re widely offered by a variety of different lenders in different forms.
- Such financing may require you to dip into your home equity or take out a second mortgage.
- Secured loans may put your home at risk if you fail to repay them.
- Some loan types may come with higher interest rates attached.
- Substandard credit scores and financial histories may limit your range of options.
Home Improvement Loan FAQs
Let’s go over some of the most frequently asked questions regarding home improvement loans:
How do I get a home improvement loan?
You can get a home improvement loan by applying for one with a traditional or online financial lender. Your lender will review your income, expenses, credit score, credit history and other pieces of information against its eligibility requirements. If a lender extends financing to you as a borrower, they will do so under proposed terms and conditions that you’ll either accept or decline.
When should I take out a home improvement loan?
Home improvement loans can be very beneficial depending on how you plan on using them. For example: If you’re facing large and/or variable expenses that might impact your quality of life or come at an extreme cost, this form of financing might be a good option.
How much does a home improvement loan cost?
Your APR, or annual percentage rate, defines what the average cost of your loan will be each year. This amount includes expenses related to both interest and fees and covers the cost of paying back your loan amount plus any necessary servicing expenses that are paid to your lender. Be advised that APRs can vary widely depending on loan type, your chosen lender, the lender’s offer, the loan term and your credit score.
Are there different types of home improvement loans?
There are five different types of home improvement loans: personal, cash-out refinance, home equity, home equity line of credit (HELOC) and FHA rehab loans. All of these loans can help you fund various home improvements and upgrades in different ways.
The Bottom Line
When you hear home buyers speaking about home improvement loans, be advised that they’re typically referring to personal loans that have been promoted under the catch-all banner of “home improvement loans.” However, other loan types qualify under this banner too – such as home equity loans, home equity lines of credit (HELOCs), and cash-out refinances (cash-out refis).
One way to finance a home improvement or renovation is by using your home equity with a cash-out refinance. Start your application today to see how much you can qualify for.
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