Improving your home can improve your quality of life and even build additional value into your home. But home improvements can be expensive. If you can’t afford to make repairs or improvements with cash or savings you have on hand, you might consider a personal loan for home improvement. Here is how home improvement loans work and other alternatives for financing a home repair or improvement project.
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What is a home improvement loan?
A home improvement loan is essentially a loan used for home improvements. There are different types of home improvement loans. In this article, we’ll profile unsecured personal loans for home improvement. They can be obtained from most lenders and are set up as installment loans with payment terms of one to seven years. The interest rate is fixed, as are the monthly payments. Read on to learn how they work and how to apply for one.
How do home improvement loans work?
Home improvement financing can be for any amount. They usually range somewhere between $5000 and $100,000, depending on the amount of work the homeowner wants done. Once obtained, the loan funds can be used to pay for materials, workers, licensing, and other home related expenses. Interest rates are determined by the credit score of the borrower.
How do I use a loan for home improvement?
Because a loan for home repairs is a type of personal loan, you can use it for just about anything you need related to a home improvement project. This can include tools, supplies, or even hiring a professional to do the work. Once you apply and are approved for the loan, you’ll be sent the loan funds either through direct deposit into your bank account or a paper check. After you receive the funds, you can then use them as you would any other cash.
However, keep in mind that you’ll be required to start paying the loan back right away plus interest, so it’s important to budget for the monthly payments prior to applying for the loan.
What can home improvement loans be used for?
Home improvement loans have a variety of uses beyond the first items that pop into your head. There are a number of pros and cons to using a home improvement loan for each of the below purposes, so it helps to break each down individually:
There are a number of benefits to using a home improvement loan for general renovations, most notably:
- Fast and simple way to secure funds for your project.
- Good for smaller sums of money.
- Fair interest rates for people who have good credit.
However, there are a number of drawbacks that are important to keep in mind as well. Consider the following before using a home improvement loan for renovations:
- You might not have enough borrowing power for your full renovation.
- The payback period for these loans will likely be shorter.
- Interest rates can grow high if you have a poor credit score.
Related: Personal loans for home renovation
Kitchen remodeling is a major expense for many, which is why using a home improvement loan for the task can be worthwhile. Some of the major benefits to this include:
- Most home improvement loans are unsecured and won’t require collateral.
- Home improvement loans are typically within the budget for a kitchen remodel.
However, on the other hand, there are a number of potential downsides you may run into when funding your project via a home improvement loan:
- There are no tax benefits from the interest payments.
- If you are conducting a complete kitchen overhaul including the replacement of appliances, a home improvement loan may not be enough.
A home repair loan can be used for a landscaping project, though this may not come to mind at first. Home improvement financing for landscaping projects can provide some of the following perks:
- Most home improvement loans will have fixed payments which means you know exactly what you’ll owe.
- Interest rates will be easy to compare from different lenders.
- The variability in landscaping costs means taking a larger loan out and using what you need, then preserving the rest for other purposes is possible.
While a home improvement loan for fence financing or another landscaping project may seem enticing based on the above, consider the following home remodel loans drawbacks:
- The standards borrowers hold you to may be too high.
- The funds may not be enough if you underestimate your project.
Related: Landscaping financing
Where to get home improvement loans?
Since home improvement loans are a type of personal loan, you can get one from either a bank, credit union, or online lender. Banks and credit unions may be better if you’re already an existing customer or member, and if you have an excellent credit score. These institutions typically have higher interest rates and stricter qualifications than online lenders. Online lenders also have faster application, approval, and funding processes, sometimes within the same or next business day.
What are the different types of home improvement loans?
When it comes to financing home improvement, there are various options. The first, as we are discussing in this article, is a personal loan, but other types include:
1. Cash out refinance
Cash out refinancing is when you take out a new mortgage loan with a larger balance than your current mortgage. Then, you pay off your existing mortgage (with the new one) and keep the remaining cash, which you can then use for home improvements. Doing this will increase your mortgage payment and the total amount of interest paid over the life of the loan due to the larger loan amount. However, it can be a good idea when you can secure the new mortgage at a lower interest rate or adjust the term to pay off the loan sooner. That said, refinancing starts your loan term length over. Before pursuing this option, consider how much cash you need to finance your home improvement and if it is worth extending and enlarging your mortgage payments.
Related: How Does Cash Out Refinance Work?
2. FHA 203(k) rehab loan
If you’re buying a fixer upper and need loan funding, you can apply for an FHA 203(k) rehab loan. Backed by the government, it bundles your mortgage and home improvement costs into one. While mortgage rates and down payments can be low, and you don’t have to have an excellent credit score, it’s only designed for older or dilapidated homes with renovations costing more than $5,000. Additionally, you can only use the cash to improve the function of the home. For instance, you can’t use it to put in a swimming pool.
3. Home equity loan
If you have a lot of equity in your home and need cash for a big project, a Home Equity Loan (HEL) may work for you. It allows you to borrow against the equity you’ve built in your home and is dispersed as a single payment. However, you’ll be required to pay off both your mortgage and the HEL, and having a second mortgage payment can be difficult to repay without careful budgeting. Additionally, unlike personal loans for home improvement, a home equity loan uses your home as collateral, meaning you could lose your home if you default on the loan. That said, HELs typically come with lower interest rates and larger loan amounts, which may be beneficial for the project you’re taking on.
Related: How Does a Home Equity Loan Work?
4. Home equity line of credit
A HELOC is similar to an HEL, but functions more as a credit card does. You can borrow from the HELOC (up to a preapproved limit) and then pay it back, and then borrow from it again. If you have longer or more expensive projects and an excellent credit score, this can be a good option. But note that the interest rates are variable, and the loan term can range from 5-20 years and the repayment terms can be changed.
How can I get a loan for home repairs with no equity?
Equity is the difference between the appraised value of your home, and what you owe on your mortgage. If your home is worth more than your mortgage, you have positive equity. If it’s worth less, then you have negative equity. Negative, or no equity, can happen if you buy your home with a smaller down payment or your home’s value decreased.
Even if you don’t have equity in your home, you can still get a home improvement loan. Try applying for an unsecured home improvement loan or personal line of credit, neither of which require collateral but have flexibility to pay for home improvement projects and upgrades. Credit cards can also be used.
When should you take out a home improvement loan?
If you have a large home improvement project that will take either a long period of time to complete or a large amount of money, and you don’t have enough cash in savings or enough time to generate more savings, a home improvement loan can be an option.
However, you’ll want to be sure you have a strong enough credit score and credit history to get a low-interest rate and have it in your budget to make the monthly payments in full and on time. You should also explore other financing options to make sure you’re finding the best one for your financial situation and home improvement needs.
Who are home improvement loans best for?
Home improvement loans are best for borrowers who:
- Need extra cash to complete home improvement projects or renovations.
- Have great to excellent credit scores, allowing them to get lower interest rates on the loan.
- Can afford the monthly payment and are able to repay the loan within the term.
- Have compared all of the options to find the best personal loan for them.
Home improvement loans vs. equity financing
If you don’t have enough equity in your home, or don’t want to use it as collateral and risk losing it, you may want to apply for a home improvement loan. However, if you do have equity, you may be able to get a lower monthly payment on a HEL or HELOC. Compared to personal loans, HELs typically have lower rates and longer repayment terms, and HELOCs let you borrow at any time over a certain period of time, which can be especially helpful for long-term or larger cost projects.
What’s the difference between a home equity line of credit and a home improvement loan?
|Home equity line of credit (HELOC)||Home improvement loan|
Average home improvement project costs
Your home’s improvement costs can depend on where you live, the room you’re working on, and the extent of renovations you’re doing. However, according to HomeAdvisor, here are some estimated costs of common home improvement projects:
|Project||Average cost range||National average|
|Building a deck||$4,091 – $11,386||$6,919|
|Installing a roof||$5,619- $11,947||$6,626|
|Installing countertops||$1,853 – $4,317||$2,819|
|Installing a patio or pathway||$1,923 – $5,491||$2,937|
|Installing a furnace||$2,800 – $6,761||$3,881|
|Installing an AC unit||$3,800-$7,586||$5,233|
|Installing windows||$2,953 – $9,546||$4,745|
|Painting a home exterior||$5,400-$9,750||$2,575|
|Installing electrical wiring or panels||$554 – $2,297||$1,324|
|Installing a septic tank||$3,227 – $10,581||$6,892|
While there are ways you can make your improvements cheaper, like by buying cheaper materials or doing more work yourself vs. hiring a pro, there are also tradeoffs you’ll have to make such as having to re-do the project down the road because it didn’t hold up as well.
As you can see, if you’re renovating multiple rooms or have multiple projects, these costs can add up quickly. That’s why it’s important to compare personal loans for these home improvement projects to find the best one for you.
Is a home improvement loan a good idea?
A home improvement loan is only a good idea if:
- Your credit score is good enough to get you a low interest rate.
- You can afford the monthly payments and they fit into your budget.
- You’ve compared all of your options and found a personal loan is best.
- You don’t have time or the ability to save enough money for the projects without taking out financing.
- You have a plan for home renovations or projects and will use the funds wisely.
Pros and cons of home improvement loans
|Work can be started immediately and completed on schedule||Additional debt added to current home expenses|
|Monthly fixed payments are easier to budget than variable payments||Interest rates are high for bad credit borrowers|
|Interest rate is fixed||Home improvement loans come with origination fees and monthly fees|
|Home value will increase||Loan might not cover all costs|
Alternatives to home improvement loans
Home ownership gives the borrower additional options. Instead of applying for an unsecured personal loan or other type of loan that could come with a high interest rate, you can use one of the following options:
Depending on how much your home improvement projects are going to cost, you may be able to use a credit card to make the purchases. This may be the quickest type of funding unless you apply for a higher line of credit. You can also try applying for a card with an introductory 0% APR, so you won’t accrue interest for a few months. Keep in mind that you’ll have high interest charges on the remaining balance from month to month, so if you’re not able to pay the card off, you may end up paying much more over time.
Home improvement loans for bad credit
Individuals with bad credit (credit score under 670) will have difficulty getting a home improvement loan if the amount needed is $10,000 or above. Smaller loans are available, but interest rates will be high, and they might not provide enough funding to finish the home improvement project. A home equity loan or HELOC might be a better option.
Pros and cons of home improvement loans for bad credit
|Pay for your home improvement sooner||High interest rates and fees|
Taking out a personal loan for a home improvement project when you have bad credit might not be the best option for you. On the positive side, if you do it and pay it off, your credit score will improve.
How do I qualify for a home improvement loan?
- Check your credit score before applying
- Research lenders that specialize in home improvement loans as some may work with bad credit borrowers
- Home improvement loans are larger than the average personal loan, so a good credit score, usually at 670 for a loan of $10,000 or more, is essential for the borrower
- Try to improve your credit score
How to compare home improvement loan lenders?
A home improvement lender is a partner in your journey of home ownership, so you’ll need to know that you can trust them. Here are some steps you can take to find the best lender:
- Research established lenders and check their reviews online, or work with a lender who you already have an established relationship with.
- Verify the legitimacy of any potential lender with the Better Business Bureau.
- Compare interest rates, terms, and fees for personal loans with multiple lenders.
How do I apply for a home improvement loan?
- Choose the amount you want to borrow
- Research multiple loans for home improvement lenders
- Fill out the application. Most lenders allow you to do this online
- Be prepared to provide a driver’s license or state ID, proof of income (paystubs, W2s and 1099s), verification of employment, and access to your credit report
- Approval for larger loans takes a few days
Yes, you can use personal loans for home improvement for any improvement project, repair, or renovation, including installing a pool or hot tub.
Learn more: Pool Loans
Even if you have a mortgage, you can still get a home improvement loan. Just know that the amount of your mortgage and existing debt can affect your new loan’s interest rate and term. You can also use your mortgage and home’s equity to take out an HEL or HELOC instead of a personal loan, depending on which is best for your situation.
The best personal loan to get for home improvements is one that has a low interest rate with monthly payments you can afford. An unsecured personal loan may be better so you don’t risk losing your home if you can’t make the payments, or an HEL or HELOC may be better if you have enough equity in your home. A secured personal loan may have lower rates if you’re confident in your ability to repay it.
Personal home improvement loan terms can last from 12 to 84 months, though most range between two and five years, depending on the project. Home equity loans typically have longer loan terms, ranging from 5 to 20 years. If you can, get preapproved for different loans to understand what term you’d qualify for and what the monthly payments would be.
For veterans wanting a home improvement loan, the best place to look is a credit union that caters specifically to veterans and military members, such as Navy Federal or PenFed, or a bank or online lender that has favorable terms. Additionally, some states offer home improvement loans specific to veterans. It is worth researching the program in your specific state to learn if you qualify. When comparing personal loans for veterans, consider possible discounts you’d be eligible for through the institution, compare interest rates, and be sure to check for other fees.