The price of home repairs and improvements can skyrocket quickly, whether your project is a necessity or a desire to remodel. Many people turn to home improvement loans to provide the financing required.

It’s normal to have questions when you first begin the search for the correct loan for your needs. This guide helps you discover the options that are available and how to determine which is right for your project and circumstances.

What Are Home Improvement Loans?

A home improvement loan is a lump sum borrowed from a financial institution that covers the costs of projects done to increase a home’s value. Some alterations could be necessary and done to fix structural issues. Others are purely cosmetic and meant to add convenience or aesthetic appeal.


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Which Projects Are Best?

Consider the end result and choose your home improvement projects carefully. What is important and valuable to you might not have the return you want from future buyers. Calculate the return on investment before you begin. Bathroom additions, patio installation, and major kitchen remodels generally see poor ROI. Better options are minor kitchen projects, new garage doors, replacement siding, and stone veneer.

Home Improvement Loan Options

There are several types of loans available to finance home improvement projects. Learn more about each type to compare the pros and cons.

Home Equity Loan

A home equity loan has a fixed rate and uses your home as collateral to secure the loan. Borrowers can get up to 80% of the home’s value. Any outstanding mortgage lowers this amount.

Home equity loans are generally approved quickly and have fewer associated costs. The downsides are that they may have higher interest rates and smaller loan amounts than other options. It’s possible that this loan type won’t cover the full cost of your planned project.

Home Equity Line of Credit

HELOCs give you access to an approved amount of funding that you can borrow from and pay back as needed. Once you repay the balance owed, you can take it out for another use. Interest rates on HELOCs are variable, with payment amounts calculated using the rate and current amount outstanding.

The draw period of the HELOC is when you can use some or all of your approved loan amount. You are only required to make payments on the interest. After the draw period closes, repayment is due and you can no longer withdraw additional funds. This usually lasts around 10 years.

HELOCs offer a flexible way to borrow money. While initial costs and payments are low, your monthly payment amount may rise significantly when it comes time to pay the principal along with the interest.

Cash-Out Mortgage Refinance Loan

This common home improvement loan works by refinancing your current mortgage. You take out a new loan and borrow more than the amount you still owe on the home. Then use the excess funds for your remodel or repairs. It’s possible that you may find more favorable loan terms when you refinance that could result in a lower interest rate or payment.

You must have equity built in your home to qualify for a cash-out refinance. A good credit score improves your odds of eligibility and receiving a low-interest rate.

Cash-out refinance loans are typically capped at 80% of your home’s market value. They provide larger loans than some other alternatives at a fixed interest rate. However, it takes time to get through the application process. You may also end up paying higher interest rates or closing costs.


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FHA Title I Loan

If you have difficulty obtaining a loan due to a low credit score or debts, then a government loan is an excellent choice. Loans backed by the Federal Housing Administration pose less of a risk to a lender if you default on the loan terms. A Title I loan allows you to borrow as much as 85% of the home’s market value at a fixed interest rate. You must purchase mortgage insurance and a 1.75% fee is added to your total loan cost.

The Veterans Administration also backs loans for eligible current and former military service members. It’s possible to finance 100% of your home’s market value with a VA loan. You don’t need mortgage insurance and you get the benefit of a fixed interest rate. The drawbacks of a VA loan include potentially high interest rates, income verification, and the need to get an appraisal.

203k Loan

Another government-backed loan possibility is the 203k. With this loan, you can borrow the funding needed for the purchase of the home plus the improvements under one loan. Alternatively, use the 203k loan to refinance up to 97.75% of the expected future market value after proposed improvements.

A 203k loan is generally affordable and requires no home equity. Even buyers and prospective homeowners with bad credit may qualify. These loans are not available for investors who flip houses. The application process is long and requires the assistance of your contractors. Additionally, the FHA can require you to meet certain safety requirements and building codes.

Personal Loan

Both secured and unsecured personal loans are an option for home improvement costs. A secured loan uses collateral, while unsecured loans aren’t tied to your assets. Secured loans are less risky for lenders as they can possess your assets if you default on the repayment of the loan. It’s more difficult to qualify for an unsecured loan and you must prove your income and employment, as well as have good credit.

The good news is that personal loans don’t require home equity or appraisal and the process is usually fast and simple. The negative side of personal loans includes higher interest rates. Borrowers with poor credit are more likely to have unfavorable rates. Loans are also generally limited to $100,000, which might not cover the cost of your improvement plans.

Personal Line of Credit

Get access to a revolving line of credit where you control when and how much you borrow, up to your approved amount. Personal lines of credit are flexible but carry variable interest rates that can cause your balance to spike and become difficult to repay.

Alternative Loan Options

While less common, there are additional ways to obtain financing for home improvement. The most used are:

  • Contractor Financing Options: In certain cases, the contractor you select could offer financing for your project. Always check the terms of the loan, as they vary greatly depending on the contractor.

  • Peer-to-Peer Loans: Online lending platforms give loans of up to $40,000 for certain home improvements. Rates vary and those with bad credit receive higher interest rates. The application process for a peer-to-peer loan is fast and you retain your anonymity, so you won’t receive phone solicitations.

  • Credit Cards: Credit cards can give you access to fast cash, but use them with caution. Interest rates are high unless you pay the balance in full within 30 days. You only have access to your pre-approved card limit, which is typically four figures or less.

Tread carefully when considering these alternatives. There are some great deals available, but oftentimes you end up paying higher fees and owe more in the end.

Where To Get a Home Improvement Loan

Many lenders offer loans to cover home repairs and remodeling. You can apply with banks, credit unions, and online lenders. Some of the best lenders to consider for HELOCs and personal loans are:

  • Bank of America

  • Wells Fargo

  • Avant

  • LightStream

  • First Florida Credit Union

Before you borrow, determine the loan amount you need. Appraise your current situation and gather information on the amount of home equity you have, your income and credit rating, and the timeframe you have to secure the loan.

Research loan terms and rates from several lenders before making your decision. Compare total costs and your approval amount. Watch out for lenders that require large lump sum payments. If you opt for a HELOC, know the draw and repayment period terms.

A great strategy to locate the loan you need without spending hours doing research is by using LendingTree. This online service matches you with relevant lenders based on the information you provide.

Home Improvement Loan Eligibility Criteria

Another critical part of the loan process is finding out what the qualifying criteria are and how you can get approved. Documentation that your lender may require includes:

  • Identification

  • Social Security number

  • Proof of income

  • Employer information

  • Proof of residency

Certain loans require additional information to prove your homeowner insurance and taxes. All lenders are likely to run a credit check. Know your current score to avoid surprises and find the lenders that work with your score and history range.

Final Thoughts on Choosing the Best Home Improvement Loan

Finding the right home improvement loan requires research on your part. Gather your information and have a clear idea of what you want to accomplish. Calculate the basic numbers so you are ready to talk to lenders when you begin the application process. Always compare several rates before you accept a loan offer to ensure you receive the most favorable terms and interest rate possible.