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The best home improvement loans for you!
Whether fixing a roof, remodeling a kitchen, or building an addition, you will need one of the best home improvement loans that fits your needs. Unless of course, you have huge savings to cover the remodeling expenses. But if you (like the majority of American homeowners out there) are looking for the best loans for home renovations, you will need to do some due diligence.
Here's how you can go about finding your ideal borrowing option: do your research, compare lenders, and choose the best loan based on your financial situation and the scope of the renovation project. When shopping for the best home improvement loans, you need to search for the one with the lowest interest rate, the shortest repayment term, and the fewest fees possible.
If you approach the process carefully, you'll be able to bring your home improvement dreams to life!
Funds from home improvement loans can cater to diverse projects such as home additions, repairs, and renovations. Typically offered as unsecured personal loans, these financing options are accessible through online lenders, traditional banks, and credit unions. Alternatively, home improvements can be financed using a home equity line of credit (HELOC), home equity loan, or cash-out refinance.
Home improvement loan rates range from 5% to 36%, depending on factors such as the project type, loan lender, type of home improvement loan, and borrower qualifications (which are based on credit score and employment history).
Repayment terms for home improvement personal loans usually span from to 12 years, while home equity loans often extend beyond a decade. Depending on the repayment term, this timeline may result in higher monthly payments and an increased overall borrowing cost.
A home improvement loan is specifically designed for funding home repairs, renovations, or enhancements. A crucial step before your loan approval is to utilize a reliable home improvement loan calculator to approximate your loan payment amount for a home renovation.
You can determine your monthly loan payments based on your budget, and varying parameters, to reach estimates and evaluate the best financing options.
Once you have a solid estimate, begin your search for the most suitable home improvement loan. Consider the following factors when evaluating lenders:
Interest rates: Home improvement loan interest rates vary based on financing type, lender, and borrower creditworthiness. Personal loan rates typically range from 5% to 36%, while HELOC rates can be between 2% and 18%.
Loan terms: The loan term is the duration for repayment. Home improvement loans, being personal loans, often have shorter terms than mortgages. This results in larger monthly payments but lower overall interest payments.
Loan amount: The amount borrowed is a crucial factor. Home improvement loans may have a maximum limit, often around $100,000.
Origination fees: Some lenders charge an origination fee, typically ranging from 1% to 5% of the total loan amount. However, numerous online lenders now offer fee-free loans.
Prepayment penalty: Be aware of potential prepayment penalties, where a fee is charged for early loan repayment. That said, many lenders are willing to forgo prepayment fees to stay competitive in the market.
Applying for a renovation loan makes good sense when you're planning to buy a fixer-upper or are making value-enhancing upgrades to your existing home.
When you're planning a home improvement project, several loan types can help you finance it. Keep in mind that choosing the right loan depends on the cost of the project, how much equity you have in your home and your credit score.
When shopping for a home improvement loan, it's important to compare different lenders and loan types to find the best deal.
Here are a few tips:
- Fixed vs. variable rates: Decide whether you want the security of a fixed rate or the potential savings of a variable rate that may change over time.
- Approval criteria: Lenders look at your credit score, debt-to-income ratio (DTI ratio), and income. The better these numbers are, the more favorable your loan terms will be.
- Fees: Pay attention to any fees that may increase the cost of your loan. These could be origination fees or application fees.
- Project size: Choose the right loan based on your project size. Home equity loans or personal loans are best for single projects with a set budget, while a HELOC may be better for ongoing or unpredictable costs.
- Repayment options: Keep an eye on the repayment terms. Personal loans typically have shorter terms than home equity loans. It also means your monthly payments may be higher.
Fortunately, there are many home financing options available to help you get the money you need to borrow – from home improvement loans to lines of credit. Here are some of the best loans for home renovations.
Home equity loans
If you have built up a good amount of equity in your home (meaning the value of your home is higher than what you owe on your mortgage), a home equity loan could be a solid option. It is like a second mortgage and is secured using your house as collateral. And, the loan usually comes with a fixed interest rate.
These loans allow you to borrow lump sum money based on your home equity, typically between 80% and 85% of your home's value.
That is to say, the entire amount of the loan will be in your bank account once the loan is approved. After that, you'll make repayments over five to 20 years.
Due to the fixed rate, your monthly payments remain more or less the same, even if interest rates rise during the life of the loan (loan term).
A home equity loan works well to finance home improvements if you have at least 20% equity in your house. Moreover, this kind of loan is best suited for large-scale home renovations, such as remodeling a kitchen, a bathroom renovation, or another major home project.
Since the loan is secured by your home, the interest rates are usually lower compared to unsecured home improvement loans. Moreover, you may even be able to write off the interest if you use the funds for home improvements. The downside? If you can't keep up with payments, you could risk foreclosure.
Home Equity Lines of Credit (HELOC)
A HELOC works similarly to a credit card – you can borrow against the equity in your home as needed, rather than receiving a lump sum all at once. This is particularly useful for ongoing projects where costs might fluctuate. HELOCs generally offer lower interest rates and the flexibility to draw funds when you need them.
The average draw period (the amount of time you can withdraw funds) for a HELOC is up to 10 years, with a repayment period going up to 20 years. Interestingly, after the loan has been repaid, the homeowner can renew the line of credit if needed.
You can get a line of credit worth up to 85% of your home's value, minus what's owed on any mortgages. Keep in mind that HELOCs come with variable interest rates, meaning they fluctuate to match current market rates.
A HELOC is your best loan option if you're unsure about your total home improvement project cost. Or, if you plan to pay for it in stages. The loan could be for anything, from adding a new kitchen island to building a sunroom or other home additions.
Like home equity loans, HELOCs are secured by your home, so failing to make payments could put your property at risk. However, if the loan is strictly for home improvements, you can still enjoy tax-deductible interest.
Personal loans
For smaller or mid-sized projects, personal loans are a quick and flexible option. They are usually unsecured – meaning you don't need to use your home as collateral.
You can borrow a fixed amount of money and pay it back in monthly installments with interest for a loan term, usually shorter than other options. The upside is that there's less risk to your property, but the interest rates are usually higher, especially if you don't have excellent credit.
Many loan lenders allow you to pre-qualify for the loan without damaging your credit score so that you may view your possible interest rates and loan terms.
Personal loans are ideal for fast funding, which can be useful for emergency repairs or smaller projects that don't require a lot of money.
Cash-out refinancing
If you have a large renovation in mind and want to spread out the payments over time, cash-out refinancing might work. With this option, you replace your current mortgage with a new one with better rates and use the difference to fund your home improvements. It's like taking out a new loan with longer repayment terms (up to 30 years), which can help keep your monthly payments lower.
Therefore, you can convert the equity in your home into cash. Keep in mind that the new home loan will be for a larger amount than the existing one. It allows you to get the difference in cash between them. This type of loan is a riskier one that lowers your home's equity and is frequently utilized to cover unforeseen expenses. The downside is that you may go underwater on your mortgage if the value of your home decreases.
Also, if current mortgage rates are higher than your existing rate, you may end up paying more in the long run. Additionally, closing costs can be higher with cash-out refinancing compared to other loan options.
Government loans
If you qualify and fit the specific requirements of a government-backed loan such as the FHA loan by the Federal Housing Administration or a VA loan by the U.S. Department of Veterans Affairs, you could save on the interest and insurance.
And, there are other benefits too. For example, the HUD property improvement loan by the U.S. Department of Housing and Urban Development lets you borrow up to $25,000 without having any home equity. It's a good home repair loan option if you need to make upgrades to a recently bought house. The only condition is that the money must go toward renovations that improve the livability of the home and its value.
If you're looking to buy and renovate a home at the same time, an FHA 203(k) rehab loan might be your best bet. Supported by the Federal Housing Administration, this loan lets you roll both the purchase price and the renovation costs into one loan. It's particularly helpful if your credit isn't perfect, as the FHA's lending requirements are more lenient.
The advantage of government loans is that they generally have better terms and conditions than most private loans. But, the drawback is that there are stringent rules for loan eligibility that not everyone may qualify for.
Conventional renovation loans
Conventional renovation loans are a good option if you need more funding than FHA loans allow. Fannie Mae's HomeStyle Renovation loan is one example. This type of loan lets you borrow based on the value of your home after the improvements are made, which can help if you're planning to add value to your property.
Conventional loans usually have fewer restrictions on the types of renovations you can do compared to FHA loans, making them ideal for bigger or luxury projects.
0% APR (annual percentage rate) credit cards
0% APR credit cards, which waive interest charges for an introductory period of about 12 to 18 months, are another option to finance your home improvements, especially smaller home upgrades. However, you should only use this option if you're confident that you can pay off the card's balance in full before the introductory offer expires.
Generally, a credit card requires a credit score higher than 670. The downside is that you may get penalized hard if you fault on your monthly payments. Credit cards are recommended only for smaller, less expensive upgrades.
When looking for the best home improvement loan, you need to search for the one with the lowest interest rate, the shortest repayment term, and the fewest fees possible.
Here are some of the top home improvement loan lenders based on APR, loan amounts, repayment terms, and credit requirements. The data has been sourced from the consumer financial services company Bankrate.
| Loan Lender | Best for | APR | Loan Amount Available | Minimum Credit Score |
|---|---|---|---|---|
| LightStream | Long-term financing | 3.99%-16.99% (with autopay) | $5,000-$100,000 | Not specified |
| SoFi | Unemployment protection | 5.99%-18.85% (with autopay) | $5,000-$100,000 | 680 |
| Marcus by Goldman Sachs | Minor home improvement | 6.99%-19.99% (with autopay) | $3,500-$40,000 | Not specified |
| Best Egg | Consumers with limited credit history | 5.99%-29.99% | $2,000-$35,000 | 600 |
| Upstart | Consumers with below-average credit | 6.76%-35.99% | $1,000-$50,000 | 600 |
| TD Bank | Convenience | 6.99%-21.99% | $2,000-$50,000 | Not specified |
| LendingClub | Emergency home repairs | 8.05%-35.89% | $1,000-$40,000 | 660 |
| Prosper | Online-only experience | 7.95%-35.99% | $2,000-$40,000 | 640 |
Home remodel loans FAQs
The specific credit score requirement for a home improvement loan can vary among lenders. However, in general, a credit score of 620 or higher is often considered a minimum threshold for qualification.
Two common methods for financing home renovations within a mortgage loan are:
- FHA 203(k) Loan: This Federal Housing Administration (FHA) loan allows borrowers to combine the purchase or refinancing of a home with the cost of its renovation.
- HomeStyle Renovation Mortgage: Offered by Fannie Mae, this type of mortgage enables borrowers to finance the purchase or refinance of a home along with renovation costs.
Both options typically involve working with a lender and a qualified general contractor to ensure the renovations meet certain standards.
Pros
- It allows you to borrow money based on the expected value of your upgraded home.
- You can use the loan amount to restore an old home.
- Since you're applying for both a mortgage for the house and renovation, your interest rate will usually be lower - with a longer period to repay the loan.
- If you're making improvements that will add value to your home, you can expect the interest to be tax deductible.
Cons
- There are not many loan lenders or banks who are willing to offer special "renovation loan" programs.
- You'll have to prove to the bank or your mortgage lender that your renovated home will have a higher value.
- Qualifying for a loan takes longer than a traditional mortgage.
Typically, home improvement loans are not tax-deductible. However, the interest on certain types of loans, such as a home equity loan or HELOC, might be deductible if the funds are used specifically for home improvements and meet certain criteria.
