Perhaps you’re looking to replace your weather-worn back deck or want to redo your powder room to fix the chipped floor tiles and leaky sink. Whatever your home project is, if you’re looking to spend money on your property and don’t want to (or can’t) pay out of pocket, you may want to explore your finance options. Specifically, a home improvement loan.
What Is a Home Improvement Loan?
A home improvement loan is financing that is secured to pay for home-related expenses. Like repairs or an addition for your house. Many brick-and-mortar banks, credit unions and fintech companies offer these types of loans. And like other types of loans, this money carries an interest rate and payment terms that the borrower needs to adhere to when paying the money back.
Why You Might Want a Home Improvement Loan
There are a number of reasons why you might want to finance a home improvement through a loan.
- You require a large amount of funding. Sometimes a home reno project requires money you just don’t have (or can’t save for in a reasonable amount of time before you start a project).
- It’s an emergency. If you’re on a tight timetable or an urgent need has popped up, home improvement loans might be the best option for your situation.
- You want to pay a little bit over time. Perhaps you’d prefer to borrow funds and spread the payments out versus dropping a good chunk of change down all at once.
Whatever your reasons, remember that all personal loans require some consideration of the pros and cons before you push forward.
Secured Loans vs. Unsecured Loans
Let’s take a quick detour to discuss secured loans and unsecured loans. When it comes to personal loans, here’s what you need to know about them:
- Secured loan: This type of loan requires collateral, like a home. Since the borrower is putting up an asset, a lender typically views lending this money as less risky. A mortgage is an example of a secured loan. A secured personal loan is generally easier for a borrower to get. Secured personal loans tend to have lower interest rates.
- Unsecured loan: This type of loan doesn’t require collateral; rather, a person’s creditworthiness helps a lender determine whether or not they should lend someone money. A student loan is an example of an unsecured loan. An unsecured personal loan might be more difficult for a borrower to qualify for. Unsecured personal loans tend to have higher interest rates.
Depending on factors such as your credit score and how soon you need the money, you may choose one option over another.
6 Types of Home Improvement Loans
You have several options when it comes to home improvement loans. Here’s what you need to know about the different types of loan funding.
1. Credit Card
OK, this isn’t a loan, but it’s still an applicable payment option. If you’re in a pinch, you could put a home expense on an existing credit card. Ideally, this would be a card you can pay off at the end of the month without accruing interest (or better yet, one that will earn you points or other favorable benefits for using it).
Alternatively, if you have good credit, you could apply for a new credit card and likely get approved in a short period of time. Depending on your creditworthiness, look for a credit card with an introductory 0% APR for a set period of time (one year, 18 months, etc.) before the higher interest rate kicks in. That way you can pay the expense off over time if you need to, which is a money-saver in itself considering the average credit card APR hovers around 20%.
2. Personal Loan
A personal loan is an unsecured loan that can be used to pay for just about anything. If you need money quickly, this might be your best bet.
You can stick with your current bank or shop around for a personal loan that meets your needs. Depending on your credit score — good or excellent would benefit you the most — you could qualify for a loan with a low interest rate. Traditional banks, credit unions and financial institutions all offer personal loans with various conditions and rates.
3. Home Equity Line of Credit
A home equity line of credit, or HELOC, can be used to fund major expenditures, such as home improvement plans but also non-property expenses like education (technically any home improvement loan can be put toward other expenses). Unlike a personal loan, a HELOC is a secured loan, and the collateral is the borrower’s equity in their home.
With a home equity line of credit, there is a credit limit, a specified borrowing period and, typically, varying interest rates and payment terms. The money is usually dispersed within one to two weeks.
4. Home Equity Loan
Unlike a HELOC, interest rates and monthly payments are fixed. However, it’ll generally take you a while to see the money — anywhere from a week to a couple of months. A home equity loan could be a good option for you if you know you’ll spend the money wisely and pay it back on time.
5. Cash-Out Refinance
With a cash-out refinance, you use some of the equity in your home to get cash. In this refinancing option, you change the terms and amount of the loan, replacing your previous mortgage with a new one (so it’s not a second mortgage like with a home equity loan). You tap into some of the equity you’ve built up — the amount you can borrow is typically capped at around 80% of your home value — to get access to cash and a new fixed-rate mortgage. (Note: You’ll have to pay closing costs with this option.)
This type of refinancing can help you take advantage of lower interest rates or a more favorable loan term. If you have some leeway on when you need the money (you’ll need to get an appraisal and follow other steps with this refinancing option), this could be a choice for you.
6. FHA 203(k) Rehab Loan
An FHA 203(k) rehab loan allows buyers or homeowners to finance both the purchase or refinancing of a house (including its rehabilitation costs) through one mortgage. This type of loan offers fixed and adjustable rates and long repayment terms.
To be sure, there are hoops to jump through with an FHA 203(k) loan and it takes a more significant amount of time to get approved — applications must be submitted through an approved lender, there are listed eligible rehab activities, you may only be able to work with certain contractors and you can only use this loan for a primary (not rental) residence, to name a few regulations. However, for the most part, you only need to put at least 3.5% toward a downpayment and can get qualified with a fair credit score.
Ultimately, the best home improvement loans or funding will depend on your qualifications, needs and availability. (Per the latter, some institutions have halted greenlighting HELOC loans with the current market in flux.) Of course, you will also want to consider personal loan rates, any origination fees, repayment terms and other factors when choosing how to pay for any home improvement projects. (Which we’ll touch on later in the article.)
5 Best Home Improvement Loans in May 2022
Here are the top personal loan lenders for borrowers looking to secure home improvement loans.
What You Need to Get a Home Improvement Loan
Exact requirements will vary by lender and loan type. In general, you’ll need some combination of the following:
- A good or excellent credit score
- Proof of income (w-2s or pay stubs for traditional employment, and likely years of records if you’re self-employed)
- Government ID or birth certificate
- A certain amount of equity in your property (a home equity line of credit, for example)
- You must be a member of some banks (like with Wells Fargo) to secure a personal loan
Many lenders require a minimum credit score to qualify for a home improvement loan. For example, you typically need a minimum credit score of at least 620 to secure a home equity loan.
What to Consider When Looking at Home Improvement Loans
When you’re shopping around for lenders and home improvement loans, there are lots of items for you to consider. Here’s a shortlist of what items you want to review and consider when researching home improvement loans:
- Total loan agreement (loan terms)
- Loan amount and maximum loan amount
- Monthly payments
- Your credit history and credit score (and any upcoming purchases you may want to defer to keep your score intact)
- Fixed interest rates
- Adjustable interest rates
- Secured personal loans (require collateral)
- Unsecured personal loans (don’t require collateral)
- Any prepayment penalties
- Late fees
Typically, for personal loans, you can look up your eligibility, loan offerings and current rates on a company’s website. In some cases, you might find out you qualify for a loan in a short period of time.
Additional Ways to Finance Home Improvement Projects
If you’d prefer not to take out a loan but need access to funds, you have options there, too.
You might choose to put household expenses on a credit card, for example. That has its own pros and cons (like the other funding choices) that you’ll want to consider. For instance, you’ll likely be able to secure a credit card pretty quickly, but terms (like a high interest rate) will apply. Depending on certain factors — such as your likelihood of qualifying for a home improvement loan and how soon you need the money — you may decide to go this route.
And of course, cash is king, as they say. If you can afford to pay for your home improvement projects comfortably with liquid funds, that’s probably the best way to go.
Frequently Asked Questions (FAQs) About Home Improvement Loans
We’ve answered some of the most common questions about home improvement loans to help you make a decision about whether to apply for one and which financial institution you might select.
