Home improvement loans help you finance home repairs and updates. These updates can be a great way to improve both your home’s retail value and aesthetics. For example, you might use home improvement loans to finance a kitchen remodel or an upgrade to your basement.
Regardless of their type, the best home improvement loans will give you easy access to funds, low APR without prepayment penalties, and offer flexible prepayment terms.
What Are Home Improvement Loans?
Typically, home improvement loans refer to unsecured, personal loans.
However, personal loans aren’t the only option when it comes to finding ways to finance improvement on your home. Instead, home improvement loans are a category of loans that you can use to finance a variety of different home improvement projects.
When it comes to home improvement loans, you have multiple options.
Three of the most common types of home improvement loans include:
1. Personal loans
Personal loans are unsecured loans that you can use for any purpose. Interest rates for personal loans will be based on your credit score, and you won’t need to provide collateral in order to be eligible. They’re a great option if you want to avoid using your home to secure your loan!
2. Home equity loans
Home equity loans are “lump-sum” loans used for home-related projects. You’ll secure these loans with your home itself—that means you’ll lock in a lower interest rate, but you’re also at risk of foreclosure if you default on your payments.
3. Home equity lines of credit (HELOC)
A home equity line of credit is a revolving line of credit secured by your equity in your house. A HELOC differs from a home equity loan in that you’ll only borrow money as needed—not as a lump sum. Similar to home equity loans, you’ll lock in a lower interest rate by using your home as collateral.
To determine which type of home improvement loan is best for you, review factors like your home equity, credit score, and more.
How Home Improvement Loans Work
They’re extended by traditional banks, credit unions, online lenders, and peer-to-peer lenders. Although the application process for home improvement loans will vary by lender, you’ll typically need to provide documentation and financial information to finalize your loan—bank statements, pay stubs, proof of identification, employer verification, proof of address and more.
Home improvement loan amounts can vary based on your needs (and your creditworthiness as a borrower). Home improvement loans with the best rates usually range in amount from a few thousand dollars to $100,000. Annual percentage rates (APRs) for home improvement loans typically start at 3% and can go as high as 36%.
Your interest rate will vary based on a number of factors, but the most important factor is usually your credit score. The higher your credit score, the lower your APR. Many lenders offering home improvement loans also require borrowers to meet minimum credit score requirements.
Even if your credit score hovers around the minimum required, it’s usually a good idea to go through the prequalification process, as lenders factor in other data points when deciding to approve you for a loan—including your annual income, debt-to-income ratio, and even employment status.
Home improvement loans allow you to receive all your funds upfront (unless you’ve taken out a home equity line of credit). Once your funds are disbursed, you’ll begin the repayment term, which typically lasts anywhere from 1 to 15 years. During the repayment period, you’ll make regular fixed payments on the loan, which include the principal and interest.
Types Of Home Improvement Loans
Three of the most common types of loans used for home improvement projects include personal loans, home equity loans, and home equity lines of credit (HELOC).
Personal loans are unsecured loans, which means they can be used for any purpose (including home improvement). Interest rates for personal loans will be based on your credit score, and you won’t be required to provide collateral to secure the loan. This poses a greater risk for the lender (since they have no collateral to collect if you default on your payments), which usually leads to higher interest rates. However, the fact that you don’t need to provide collateral can make personal loans a great option if you want to avoid using your home equity to secure a loan.
Home equity loans are lump-sum loans that borrowers often use for home-related projects or other needs. Your home is the asset used to secure your home equity loan, which means you can usually expect a lower interest rate as compared to personal loans. That said, if you miss your payments, you might face foreclosure on your home.
A home equity line of credit is a revolving line of credit secured by the equity in your home. As opposed to a lump sum, a HELOC lets you draw down money for home improvement expenses as needed. Because your home is used as collateral, you’ll typically be able to secure a lower interest rate because of it.
In addition to these types of loans, some borrowers also use these loans to finance home improvement projects:
- Cash-out refinance
- FHA 203(k) rehab loan
Common Reasons to Use a Home Improvement Loan
One of the great benefits of home improvement loans is their flexibility. You can use them to cover almost any type of home repair project or improvement. Some examples include:
- Deck or patio additions
- Bathroom replacements or remodels
- Roof maintenance or replacement
- Flooring upgrades
- Window replacements
- Home additions
- Kitchen remodels
Paying Back Your Home Improvement Loan
You’ll repay your home improvement loan according to the terms outlined in the documents signed by both you and your lender.
These terms will depend on the type of loan you take out to finance your home improvement project.
Personal loans typically come with repayment periods that last anywhere from 3-5 years. Personal loans also have high-interest rates and often will require prepayment penalties. The amount of these penalties will differ from lender to lender.
Home equity loans come with a repayment period that lasts anywhere from 5-30 years, but they also offer lower interest rates. Prepayment penalties will usually stop after 10 years for max term home equity loans.
Home equity loans will also usually come with closing fees, and you might also be required to pay inspection fees.
Home equity lines of credit differ from the other two common types of remodeling loans in that they don’t usually require a set schedule for repayment. Instead, HELOC gives you a set amount of time to borrow and repay the loan. For instance, a HELOC lender might give you 10 years over which to borrow the funds and 15 years to pay them back. Interest rates for HELOC tend to remain low.
Sample Home Improvement Loan Term Sheet
|Maximum Amount||70% equity ($140,000)|
|Type of Loan||Home Equity Loan|
|Additional Fees||Lender meeting – $1000
Application processing – $2000
Agent inspection – 0.2%
Closing – 0.4%
|Use of Proceeds||Remodeling kitchen
Reconstructing and Repairing Roof
Pros and Cons of Home Improvement Loans
Home improvement loans come with a specific set of pros and cons, depending on what type of loan you qualify for.
The table below breaks down the pros and cons of personal loans, home equity loans, and HELOC.
|Home Improvement Loan Pros and Cons||Pros||Cons|
|Personal Loan||Fixed monthly payments
Requires no home equity
Quickest access to funds
|Paid on one lump sum
(Potentially) higher interest rates
|Home Equity Loan||Fixed monthly payments
Lower interest rates (potentially)
|Paid in one lump sum
Requires you to leverage equity in your home
Possible closing costs
May require a home inspection
|HELOC||Allows you to take out money as you need it (not all at once)
Potentially lower interest rates
|Requires you to have and leverage equity in your home
Potential closing costs
Potential home inspection
Fluctuating monthly payments over time
Is it hard to get a home improvement loan?
There are many of options for remodeling loans (including the ones we’ve covered above).
As long as you have a decent credit score, you’ll be able to find a home improvement loan that works for you.
Should I take out a home improvement loan?
A remodel or a renovation is a wonderful way to add value to your property.
If you have a property you want to improve (perhaps to resell it,), then it makes sense to look for a cheap, easy way to finance the project—that’s where remodeling loans come in.
Are home improvement loans expensive?
Some remodeling loans can come with fees that make them less appealing.
However, the remarkable thing is there are so many options and lenders to choose from—you’re bound to find the loan that fits your specific needs.
Are home improvement loans tax deductible?
Personal loans used for home improvement projects are not tax-deductible because they’re not secured by your home.
However, because home equity loans and HELOC use your home as collateral, you might be able to deduct the interest you pay on those loans if you use the funds to “buy, build, or substantially improve” the home that was used as collateral.
Will taking out a home improvement loan help me increase my property’s value?
Undertaking a home improvement project means it’s less likely that you’ll pay for expensive home repairs down the road. For example, when you improve or replace your roof and gutters, you’ll avoid future potential rain or water damage to your house.
That said, some home improvement projects offer more value than others. Additionally, some home improvement projects are expensive—but add minimal long-term value to your home.
Home improvement loans are an effective way to finance renovations or remodeling projects. They can also add value to your home, especially if you plan to sell in the future.
Which type of loan is best? It depends on your financial situation and your project goals.
Before you commit to any loan, assess your options. Don’t just settle for the first loan you’re offered. Compare types of loans, rates, and terms. Most importantly, make sure the loan fits your needs.
At Loanbase, we’ll help you compare lenders to find the best deal for you and your project needs.