A home improvement loan is financing you use to pay for home repairs and enhancements. When you get a home improvement loan, you use the loan funds to pay your contractor or buy supplies to complete the work, then pay the loan off over time. A home improvement loan is helpful if you don’t have cash to pay upfront for home improvement expenses.
Home equity loans and personal loans are the most common types of home improvement loans, but there are other options, such as cash-out refinancing. Banks, credit unions and online lenders may offer home improvement loans.
The type of loan you choose will depend in large part on the scale of your home improvement project. Here are four types of home improvement loans and an overview of each one:
A home equity loan is a second mortgage from a bank, credit union or other lender enabling you to borrow against the equity in your home. Lenders usually limit you to borrowing 80% to 85% of your home’s value. You will repay the balance with equal monthly payments over a fixed term, in addition to your original mortgage. Learn more about the best home equity loans.
- Pros: A single lump-sum loan amount gives you the ability to tackle major projects at a fixed interest rate.
- Cons: Qualification is more involved – with funding taking up to two months – and includes a home appraisal as well as closing costs. Since your home is used as collateral, you risk falling into foreclosure if you don’t repay the loan. Plus, your budget may fluctuate over the duration of the project, so you risk borrowing too little (or too much) in case your expenses change.
- Best for: People with a clear home improvement plan and budget.
Home Equity Line of Credit
A HELOC is like a credit card because it allows you to draw funds as needed up to a limit and then repay them at a variable interest rate. HELOCs are typically limited to 85% of the equity of your home. Learn more about how to compare home equity loans and HELOCs.
- Pros: Only borrow exactly what you need.
- Cons: With variable interest rates, loans could be more costly than expected, especially when you consider HELOC closing costs. Like with a home equity loan, you risk losing your home if you fail to repay a HELOC. Finally, funding can take two to six weeks, so it’s not a good solution if you need money in a pinch.
- Best for: People who aren’t sure what the final construction bill will be.
A cash-out refinance replaces your mortgage with a new home loan for more money than you owe on the original mortgage, giving you the difference in cash. You’ll access your equity to get cash at closing, which you can use to make home improvements. Lenders may allow you to draw out up to 80% of your home’s value. Your refinanced home loan will have a new balance, payment, interest rate, and repayment terms. Most cash-out refinances have fixed interest rates. Learn more about the best mortgage refinance lenders.
- Pros: You can potentially lower your interest rate while tapping your home’s equity. Unlike with a home equity loan or HELOC, you’ll be able to keep a single monthly mortgage payment.
- Cons: With your home as collateral, you risk losing it if you fail to make payments. Because you’ll have to go through the closing process, funding can take up to 45 days (and sometimes longer). Additionally, you may not be able to secure a lower mortgage rate than what you’re currently paying, and you’ll have to pay closing costs.
- Best for: People who have built a lot of equity and plan to stay in their home for a while.
Using a personal loan for home improvement is like getting any unsecured loan. It’s not secured by your home, and your home improvement loan rate depends on your creditworthiness. Personal loans are usually available with fixed interest rates and in amounts from $1,000 to $100,000. Because a personal loan is unsecured, it will have a higher interest rate than a loan secured by your home. Learn more about the best personal loans.
- Pros: You can qualify even if you don’t have significant equity in your home, and you don’t risk losing your home since it won’t be used as collateral. Unlike with home equity loans, HELOCs and cash-out refinancing, you won’t have to pay closing costs. Plus, personal loan funding is fast, with many lenders offering same-day or next-day funding.
- Cons: Interest rates are higher than for collateral loans, and the APR you qualify for will depend on your credit score and debt-to-income ratio. You may also have to pay a personal loan origination fee, which can be up to 10% of the loan amount.
- Best for: People with good credit who don’t need a lot of cash to fund their home improvement project.
- Finance updates and repairs that add value to your home.
- Avoid draining cash reserves.
- Pay off improvements over time.
- Choose from a number of loan options to fit the scale of your project.
- You increase your debt, and in most cases you’ll be left with an extra monthly payment on top of your mortgage.
- You may need to put down collateral, which you could risk losing if you can’t repay the loan.
- Depending on the type of loan you choose, you may have to pay closing costs or a loan origination fee.
- With a home equity product or cash-out refinance, funding can take anywhere from a few weeks to a few months.
- You could pay a high APR for a personal loan, depending on your credit.
- Eligibility requirements: Find out the lender’s minimum qualifications and prequalify to check your odds of approval. Most personal loan lenders let you get prequalified with a soft credit inquiry, but home equity products and cash-out mortgage refinancing may require a hard credit check.
- Loan amounts: All home equity loans have maximum loan-to-value amounts. Likewise, personal loan lenders have minimum and maximum borrowing amounts.
- APR: Compare home improvement rates by getting prequalified rate quotes. Be sure you’re comparing apples to apples when you consider loan APRs and fees.
- Loan length: Home improvement loans with a longer repayment term will come with lower monthly payments, but will cost more to repay over time. On the other hand, loans with a short repayment term have lower total costs, but will come with higher monthly payments. Secured loans that are backed by your home’s equity may offer longer repayment options than unsecured personal loans, but your options will vary by lender.
- Customer service: Read lender reviews, and search the Better Business Bureau and Consumer Financial Protection Bureau Consumer Complaint Database to learn about the customer service you can expect from a home improvement lender.
Yes, borrowers can find a number of alternatives beyond personal loans and home equity loans, such as:
- 203(k) loans: Backed by the Federal Housing Administration, a 203(k) loan finances the purchase of a home and the cost of repairs and upgrades in one loan. There are also home improvement mortgages available through conventional lenders and the Department of Veterans Affairs.
- Title I loans: This Department of Housing and Urban Development-backed loan finances property improvements and renovations and is capped at $25,000.
- Home construction loans: A home construction loan covers the cost of building a home or a major renovation and is paid to the contractor.
- Renovation loans: Some lenders give loans based on the future value of your home, after you make the improvements. These loans are best for homeowners who haven’t built much equity yet.
Q. How Can You Get a Home Improvement Loan?
- Consider your eligibility. Home improvement lenders typically have minimum credit score requirements to be approved for a home improvement loan. Generally, you’ll need at least a 620 FICO credit score to be approved for a home improvement loan. Review your credit report to check for errors, and work on paying down debt before you apply for a home improvement loan.
- Determine how much you need to borrow. Consider your home improvement project amount and leave room for error. Don’t take out a property improvement loan that strains your finances just to make cosmetic improvements
- Determine your preferred loan term. Consider your budget and how quickly you can pay off the loan. A long-term home equity loan could make sense if you’re financing a room addition or new roof. But a 30-year loan isn’t a good choice for minor repairs that you may need to repeat before you’re done paying for them.
- Prequalify. Personal loan lenders use a soft credit pull to check your odds of qualifying and to estimate loan rates and terms. You can prequalify with multiple lenders, but first verify that the lender is only performing a soft credit check to avoid credit damage. If you’re going the home equity or cash-out refinancing route, prequalifying may require a hard credit inquiry.
- Make your selection. Run the numbers for the loan options you are considering, weighing convenience against cost. Choose a loan and finalize details such as the loan amount. With personal loans, you can get funds as fast as the next business day after you accept the loan terms. With other home improvement loans, the timeline is much longer, usually a few weeks to a few months.
Q. Can You Get a Home Improvement Loan With Bad Credit?
- A home improvement loan may be difficult to get with bad credit. Most lenders require a credit score of at least 620, and a FICO score below 580 is considered poor.
- The federally backed 203(k) loan may be one option for a bad credit home improvement loan. Borrowers need a minimum credit score of 500 with a 10% down payment or a score of at least 580 with a 3.5% down payment. This type of mortgage is available to those who want to buy a home and renovate it, so it’s not a good choice if you want to make improvements to your current home.