Whether you’re sick of shiplap or have your heart set on a kitchen with open shelving, you may be considering making some changes to your house. If so, you’re in good company; Americans spent $420 billion on home remodeling projects in 2020, according to the National Association of Realtors (NAR) 2022 Remodeling Impact Report.
However, you should be prepared for some sticker shock. The NAR study found that a complete kitchen renovation costs an average of $80,000, while a bathroom renovation costs an average of $25,000.
If you can’t pay for those kinds of renovations out of your own savings, you may be looking for ways to finance your home improvement project. The best home improvement loan option for you depends on your finances, planned renovations, and credit score.
Here’s what to know.
What Are Home Improvement Loans?
A home improvement loan, or home renovation loan, is a broad term that describes how a loan is used rather than a particular loan product. Home improvement loans are any loans that people use to pay for renovations or repairs to their houses. They can be used to update a bathroom, replace appliances, or even to add a garage alongside the home.
Before taking out a loan or line of credit for home remodeling projects, get multiple quotes and research typical costs. Tools like Houzz can help you learn about what to expect and find reputable contractors in your area.
With so many banks, credit unions, and online lenders all offering products advertised as home improvement loans, it’s important to know what specific loan product you’re actually getting. Most home improvement loans are either unsecured personal loans or home equity loans. Both types of loans are installment loans with fixed interest rates, but there are some key differences.
It’s important to note that while these loans are often advertised as home improvement loans, you can use the money for anything. And while you may have to state your intended use when applying for a loan, in most cases, your interest rate and loan terms will not be affected by whether you use the loan for home improvements.
Unsecured Personal Loans for Home Improvements
Many personal loan lenders will advertise their loans as home improvement loans, as many consumers like to use personal loans to cover home improvement costs.
Most personal loans are unsecured loans, meaning they don’t require any form of collateral. Instead, the lender determines your eligibility by reviewing your credit score and income. That’s a significant benefit, according to Jacob Channel, senior economic analyst with LendingTree.
“The biggest advantage [of a personal loan] is you can get cash relatively quickly, and you don’t have to put down the house as collateral,” says Channel. “ If you do default, the risk of losing your house isn’t there. They can be a good option if you don’t have equity yet, or have less-than-perfect credit since there are lenders that work with different credit levels.”
Since unsecured loans are riskier for the lender than secured loans, they often come with higher interest rates and stricter qualification requirements. Borrowers with lower credit scores may find it hard to qualify for a personal loan at a reasonable interest rate. If that’s the case, and you have an asset you can put up as collateral — such as a house — you may want to consider a secured loan instead.
Home Equity Loans
Another loan type commonly used (and advertised) for home improvements is a home equity loan. With a home equity loan, homeowners can borrow against the equity that they have established in their house to get a lump sum of cash to use for renovations and repairs to their house. A home equity loan is sometimes called a second mortgage because it’s an additional loan on top of your existing mortgage, that’s also secured by your house.
Home equity loans can be appealing because of their lower rates and repayment options, says Madison Block, senior marketing communications associate with American Consumer Credit Counseling, a non-profit credit counseling agency.
“Home equity loans usually have longer loan terms [than personal loans],” says Block. “So, your payment would be a bit lower because you have more time to pay it off.”
Because home equity loans are secured loans where your house acts as collateral, they typically offer lower interest rates than personal loans. However, be aware that this comes with more risk to you as the borrower — if you default on the loan, you risk losing your home.
The interest paid on home equity loans may be tax-deductible if you use the funds on home improvements and meet certain requirements.
How to Get the Right Home Improvement Loan
When deciding which home improvement loan is right for you, it’s important to consider the following factors:
- Collateral: While personal loans are typically unsecured, home equity loans use your house as collateral. “[Home equity loans] can be risky if you bite off more than you can chew,” says Channel. “It isn’t something you should do if you think you may not be able to repay it. That said, millions of people have gotten home equity loans and used them very successfully.”
- Loan amount: If you have a large home improvement project planned, a home equity loan may be a better fit. Although there are some lenders that offer personal loans up to $100,000, most lenders have a maximum loan amount of $50,000 or less. “You can usually get significantly more money with a home equity loan,” says Block.
- Interest rates: Because home equity loans are secured, they generally have lower interest rates than personal loans. “A home equity loan often comes with lower interest rates, so they’re easier to repay on a monthly basis,” says Channel. With an unsecured personal loan, your rate depends on your credit and income, but rates can be as high as 35.99%.
- Loan terms: While personal loans usually have repayment terms ranging from two to seven years, home equity loans usually have much longer repayment terms — some as long as 30 years — giving you a lower monthly payment. “Of course, with a longer time to pay it off, you’ll pay more interest,” cautions Block. In general, it’s a good idea to select the shortest loan term you can afford.
- How quickly you need the loan funds: How soon you plan on starting your home improvements can affect which loan type is best for you. It usually takes two to six weeks to get a home equity loan, as you’ll have to go through more steps in the underwriting process — such as an appraisal of your house. By contrast, personal loans usually take just a few days to disburse, and some online lenders will disburse your money as soon as the same day you apply.
- Available home equity: Although a home equity loan may give you a lower rate and longer repayment term, it’s only an option if you have adequate equity in your home. Most lenders allow a maximum loan-to-value ratio of 80% to 85% on a home equity loan, meaning you need to have at least 15% to 20% home equity in order to qualify. If you don’t meet that requirement, a personal loan may be a better choice.
Regardless of which loan type you choose, be sure to request quotes from multiple lenders to get the lowest rates and best possible repayment options.
Steps to Getting a Home Improvement Loan
If you’re unsure how to get a home improvement loan, you may be surprised by how easy it is. You can get a loan in just a few steps:
- Decide how much money you need: Request quotes from multiple contractors for your planned renovations. By getting three to five quotes, you can get an idea of how much money you really need.
- Check your credit: Check your credit score and credit report to get a sense of where your credit history stands. If you have bad credit or fair credit, you should prepare yourself for the possibility of higher rates or greater difficulty qualifying for a loan. If your home improvement needs aren’t urgent, it may be better to hold off on getting a home improvement loan until you’ve raised your credit score.
- Identify the best financing option for you: Based on your renovation costs, credit score, budget, and available home equity, you can choose the loan type that is best for you. For relatively small home improvement projects, a personal loan can be a convenient choice. But larger renovations may be better suited to a home equity loan, since you can borrow more money and have more time to repay it.
- Shop around: Whether you opt for an unsecured personal loan or a home equity loan, don’t just pick the first lender you find. Rates, terms, and fees can vary by lender, so it pays to shop around with different lenders. Check out your local bank or credit union, as well as online lenders.
- Collect necessary documents: The lender will request documentation about your income, employment, and — in the case of home equity loans — your house. You can save time by gathering and organizing those documents before starting the loan application.
- Submit Your Application: Fill out the lender’s application and attach the necessary documents. With both personal loans and home equity loans, you can usually complete the application online.
- Stay in contact with your lender: With a personal loan, your portion of the work is done after applying for a loan. The lender will review your application, make a decision and, if you’re approved, disburse the funds to your bank account. With a home equity loan, the process is more involved. You may have to work with the lender to schedule a property appraisal, pay closing costs, and set a closing date.
What Do I Need to Get a Home Improvement Loan?
When you apply for a home improvement loan, whether in the form of an unsecured personal loan or home equity loan, the lender will ask for some documentation to prove your identity and income.
Documents You’ll Need for an Unsecured Personal Loan
- Identification, such as a driver’s license or passport
- Social Security number
- Proof of income, such as W-2 forms, tax returns, and recent pay stubs
- Employer contact information
- Proof of address, such as utility bills or mortgage statements
Additional Documents You’ll Need for a Home Equity Loan
If you’re applying for a home equity loan, you’ll also need the following documents:
- Proof of homeowner insurance
- Property tax statements or most recent mortgage statement
- Proof of title insurance (may be optional in some cases)
- Proof of flood insurance (if the home is in a flood zone)
In addition to the above documents, you may also need to undergo a home appraisal of the property used as collateral when you apply for a home equity loan.
Home Improvement Loan Alternatives
While unsecured personal loans and home equity loans are the most common forms of home improvement financing, they’re not your only options.
Home Equity Line of Credit (HELOCs)
Like home equity loans, home equity lines of credit allow you to borrow money using your home equity as collateral. While a home equity loan is disbursed in a lump sum, a home equity line of credit is a revolving credit line that you can tap into again and again throughout the draw period. Because of this, a home equity line of credit can be a better option for ongoing home improvement projects where you don’t know the total cost at the start.
However, you should also be aware that home equity lines of credit are variable-rate products, meaning that the interest rate — and thus monthly payment — could change throughout the life of the loan. Home equity lines of credit tend to have lower starting interest rates than home equity loans, but in a rising interest rate environment, a fixed-rate home equity loan could be a safer option for borrowers.
With a cash-out refinance loan, you refinance your existing mortgage for an amount greater than you currently owe on your home. The lender issues you the difference in a lump sum cash payment. You can use that cash for whatever you wish, including home renovations. Unlike a home equity loan or home equity line of credit, a cash-out refinance will affect the rate and terms of your primary mortgage loan.
“A cash-out refinance is a way to get a lot of cash,” says Channel. “However, it’s not as good of an option today as it was six or seven months ago because of today’s higher interest rates.”
When you get a cash-out refinance, you can either work with your current mortgage lender or find a new lender. Shop around with multiple lenders to get the best rate, and be sure to factor closing costs and fees into the calculation as well.
0% APR credit card
If you have good credit, you could qualify for a credit card with a 0% APR introductory offer. Depending on the card, you could have as long as 21 months to pay off the balance before you have to pay interest. A 0% APR card can help you save money if you use it strategically, but make sure you have a plan in place to pay off the balance by the time the promotional period ends. Otherwise, you could end up paying double-digit interest rates.
Keep in mind that you’ll only be able to spend up to the credit card’s credit limit, so this may be a better option for smaller home improvement projects that don’t cost as much.
Government-Backed Renovation Loans
Some borrowers may qualify for government-backed renovation loans, giving them a low-interest financing option. Government loans may come with more requirements or hoops to jump through, but they can be worth it if you qualify. Programs include:
- Title 1 Home Improvement Loans: Available through the Federal Housing Administration (FHA), Title 1 Home Improvement Loans are fixed-rate loans for renovations, repairs and rehab projects with repayment terms as long as 20 years. Smaller loan amounts — meaning under $7,500 — can be unsecured, while higher loan amounts use the home as collateral.
- Section 504 Home Repair Program: Homeowners with very low incomes may be eligible for the Section 504 Home Repair Program. It provides loans to improve or modernize homes, and gives grants to elderly low-income homeowners to remove health and safety hazards.
If the home improvement project you have planned isn’t an emergency, you may want to consider holding off and building up your savings so you can pay for it in cash.
“Ask yourself, is this something I need? Or something I want?” advises Channel. “If it’s a need — like your appliances don’t work — you can explore financing options more aggressively. If it’s a want, take it slow. Think: is there another way to pay for this besides taking out a loan?”
Be sure you think carefully about your options — and your planned renovations.
“As with any big loan, don’t rush into it,” says Channel. “Do your research. Shop around to maybe get a lower rate. If you plan ahead accordingly, a home improvement loan can be a really good way to fix the evils in your home.”