What Is a Home Improvement Loan?
A home improvement loan is a type of personal loan used to pay for home renovations, upgrades and repairs. You can use unsecured personal loans to finance virtually anything, from HVAC replacements to bathroom remodeling. Personal loans typically have fixed interest rates and monthly payments, allowing you to repay the money you borrowed over a set period of years.
Home improvement loan amounts can range from $1,000 to $100,000 or more, which gives you the flexibility to finance minor or major projects if you don’t have tappable equity – or if you simply don’t want to use your home as collateral. That being said, you can also use home equity loans and lines of credit, or HELOCs, to pay for home improvements.
Pros
Fixed payments. Personal loans typically carry fixed interest rates, so the monthly payments stay the same while you repay the amount you borrowed.
No collateral. Most personal loans are unsecured, allowing you to pay for home improvements without tapping into your home’s equity.
Immediate funding. With personal loans, you can receive the funds as soon as the next business day after approval. Home equity loans and HELOCs can take weeks or months for approval, closing and funding.
No closing costs. Personal loans may carry a loan origination fee, but not all lenders charge one. With home equity financing, you’ll have to pay closing costs that range from 2% to 5% of the loan amount.
Cons
Higher rates. Since personal loans are usually unsecured, they may carry higher rates than secured financing options like home equity loans and HELOCs.
Fees. Some personal loan lenders charge an origination fee of up to 10% of the loan amount, which can be subtracted from the loan proceeds and reduce the amount of money you receive.
Credit requirements. Personal loan lenders determine your eligibility based on your creditworthiness, including your credit score and debt-to-income ratio. Borrowers with bad credit will see higher interest rates on home improvement loans, if they qualify at all.
Increased debt. Taking out a loan to finance a home improvement project adds to your overall debt load and means you’re stuck with an extra monthly payment on top of your mortgage and other debts.
What Are the Different Types of Home Improvement Loans?
Unsecured personal loans are commonly used to pay for home improvements, but they’re not the only way to finance upgrades and repairs to your home. For homeowners with sufficient equity, it may be worthwhile to consider your secured options, like home equity loans and HELOCs, which may come with more competitive interest rates and repayment options:
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. Interest rates are typically fixed and fluctuate with greater market conditions. 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.
A HELOC allows you to borrow money during a designated draw period and repay it at a variable interest rate. Like home equity loans, HELOCs are also limited between 80% to 85% of the equity in your home. Compared with home improvement loans and home equity loans, HELOCs may be a better option if you’re unsure of your project’s final costs, since you only pay interest on the amount you need to borrow.
However, tapping equity to pay for home renovations comes with its fair share of drawbacks. With home equity loans and HELOCs, you’ll have to go through a closing process and receive a home appraisal, which means it could take weeks or months to receive the money you wish to borrow. The biggest risk is that home equity loans and HELOCs are secured by your home, meaning you could lose it if you don’t repay the money you borrowed.
Home Improvement Loans vs. Home Equity Loans and HELOCs
| Personal Loans | Home Equity Loans & HELOCs | |
| Loan Amount | Up to $100,000, while some lenders offer even higher loan amounts. | Up to 80% (or sometimes 85%) of the equity in your home. |
| Repayment Term | Between 12 months and 12 years. | Usually five to 20 years for HELOCs, but sometimes up to 30 years for home equity loans. |
| Credit Requirements | Most personal loan lenders have a minimum credit score of 620, but some cater to borrowers with bad credit. | Most home equity lenders require a credit score of 620 or higher, but some have stricter requirements. |
| Interest Rates | Around 6% to 36% depending on the applicant’s creditworthiness. Rates are usually fixed. | Around 5% to 15% depending on market conditions. Home equity loan rates are fixed, while HELOC rates are variable. |
| Fees | Origination fees range from 1% to 10% of the amount borrowed, but many lenders don’t charge fees. | Closing costs are around 2% to 5% of the amount borrowed, although some lenders may offer reduced charges. |
| Funding Timeline | As soon as the next business day after approval, and some lenders even offer same-day funding. | Two weeks to two months, including underwriting and closing. |
| Collateral | Typically unsecured, which means you don’t risk losing your home if you don’t repay the loan. | Secured by your home, which means you risk losing the roof over your head if you don’t make payments and the loan will go into default. |
Current Home Improvement Loan Rates
If you need to borrow money to finance home improvements, interest rates will depend on which type of loan you choose. Unsecured personal loans used for home improvement will typically carry higher interest rates than home equity loans, but you may be able to qualify for a competitive rate if you have good or excellent credit.
Currently, the average rate on a two-year personal loan is 12.35%, according to the Federal Reserve. Loans with longer repayment periods may carry higher interest rates, especially for those with fair or bad credit. You may be able to find more competitive rates through a credit union.
If you were to choose a HELOC instead of a loan, keep in mind that interest rates are variable – meaning they could fluctuate over time. On the other hand, personal loans and home equity loans typically offer fixed interest rates, which stay constant while you repay the loan.
The average rate for a $30,000 HELOC is at 9.18% as of June 6. This average is based on a 30-year term, a 80% loan-to-value ratio and a 700 FICO score.
This analysis is powered by Bankrate, which gathers data from applicants who prequalify for HELOCs through its website and affiliates.
How to Get a Home Improvement Loan
- Consider your eligibility. Generally, you’ll need at least a 620 FICO credit score to be approved for a home improvement loan, but having a higher credit score will afford you lower interest rates. 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 and create a detailed outline of the total costs. Borrowing too little may cause you to come up short when it’s time to pay contractors, but borrowing too much means you’ll pay interest on money you didn’t need to borrow.
- Choose a loan term. Longer loan lengths come with lower monthly payments, but are more expensive to repay over time because of the accumulating interest charges. A long-term home improvement loan could make sense if you’re financing a room addition or new roof. Shorter repayment terms come with higher monthly payments but can save you money and get you out of debt faster, making them a good option for minor projects or cosmetic upgrades.
- Prequalify. Personal loan lenders use a soft credit inquiry to check your odds of approval and to estimate loan rates and terms. You can prequalify with multiple lenders to compare rates, but keep in mind that the rate advertised may be higher when you formally apply for the loan with a hard credit check.
- Apply for the loan. 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 and repayment term. Formally applying for the loan will trigger a hard credit check, which will have a temporary negative impact on your credit score.
Cash-Out Refinancing
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 at closing. 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.
- Pros: Compared to other unsecured options, mortgage refinancing offers lower interest rates and comes with the added benefit of the mortgage interest tax deduction.
- Cons: You risk losing a lower interest rate on your mortgage by refinancing, since you’ll have new repayment terms. Additionally, you’ll owe more on your mortgage, since you’re refinancing to a higher balance.
Credit Cards
Charging home improvements on your credit card may sound like an easy way to fall into debt, but this method can be done wisely with a good amount of discipline. Applicants with very good or excellent credit may qualify for a credit card with an introductory 0% APR period which typically lasts anywhere from six to 24 months. This can enable homeowners to finance small renovations at zero interest if the money is repaid before the 0% APR period ends.
- Pros: You can pay interest on only the money you need to borrow, all without having to use your house as collateral. Plus, you may be able to qualify for a credit card with a 0% APR period.
- Cons: You’ll need a high credit score to qualify for a zero-interest credit card offer, and the total cost can add up if you don’t repay the amount you borrowed before interest begins to accrue. Plus, the maximum amount you can borrow with a credit card may not be enough to finance the cost of big-ticket renovations like a roof replacement.
FHA Title 1 Loans
Backed by the Federal Housing Administration, a Title 1 loan is used to finance the cost of certain repairs and upgrades to a home, including livability improvements (replacing the plumbing or HVAC system), accessibility improvements (adding ramps for wheelchair access) or green improvements (installing solar panels). You can borrow up to $25,000 secured by your home, depending on the project, or up to $7,500 unsecured.
- Pros: An FHA Title 1 loan gives low- to moderate-income homeowners an alternative to tapping home equity to pay for home improvements.
- Cons: Title 1 loans have strict requirements for how you can use the funding, as well as who qualifies for funding. Not all lenders offer FHA Title 1 loans, so it may be challenging to find a lender to work with.
VA Renovation Loans
The Department of Veterans Affairs offers renovation loans that let you buy or refinance a property and roll the home improvement costs into the mortgage. Eligible military personnel and their families may be able to borrow up to 100% of the home’s as-completed value. Like with an FHA Title 1 loan, VA renovation loans cannot be used to finance luxury improvements like building a pool.
- Pros: You can get a competitive rate on a VA home loan with 0% down.
- Cons: You can only use this type of loan if you plan on buying a home or refinancing your current mortgage, so you can’t just borrow on top of your original loan. Also, you’ll need to meet the VA’s military service requirements in order to be eligible for a VA renovation loan.
Home Improvement Loan Calculator
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U.S. News selects the Best Loan Companies by evaluating affordability, borrower eligibility criteria and customer service. Those with the highest overall scores are considered the best lenders.
To calculate each score, we use data about the lender and its loan offerings, giving greater weight to factors that matter most to borrowers. Personal loan companies are evaluated based on customer service ratings, interest rates, maximum loan term, minimum and maximum loan amounts, minimum FICO score, online features, and origination fees.
The weight each scoring factor receives is based on a nationwide survey on what borrowers look for in a lender.
To receive a rating, lenders must offer qualifying loans nationwide and have a good reputation within the industry. Read more about our methodology.
Unsecured personal loans can be a good way to pay for home renovations if you have good credit, lack sufficient equity built in your home or just need to borrow a small amount. Home improvement loans also offer quick funding, making them a good option if you need urgent home repairs.
Home equity loans and HELOCs may be a better option for homeowners with a good amount of equity who are confident in their ability to repay the loan. Borrowing against your home’s value may take longer, though, since you’ll have to go through the closing and appraisal process. But choosing a home equity loan or HELOC can be worthwhile if you can score a much lower interest rate than you’d find with an unsecured home improvement loan.
That being said, the ideal way to pay for home improvements is to save up and use cash. Whether take out an unsecured loan or borrow against your home’s equity, you’d be stuck with an additional monthly payment – with interest, of course.
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. Additionally, borrowers with bad credit will see much higher interest rates than those with good credit. You can improve your chances of getting approved for a home improvement loan by enlisting the help of a creditworthy co-signer, like a spouse or relative, but keep in mind that they would share equal responsibility for repaying the loan.
- 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 amount: Personal loan lenders have minimum and maximum borrowing amounts. All home equity loans have maximum loan-to-value amounts.
- Loan length: 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.
- 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.
- 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 loan lender.
