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The Complete Guide To Home Improvement Loans

Hanna Kielar10-Minute Read
November 15, 2022

So, you’re considering financing repairs or improvements to your home, but you’re not sure what the best option might be. First, let’s make our terms clear. What is a home improvement loan? When people talk about home improvement loans, they’re typically referring to personal loans that have been marketed as “home improvement loans.” However, home equity loans, home equity lines of credit (HELOCs), and cash-out refinances (cash out refis) are all also solid home improvement loan options, and may in fact result in more tax breaks, lower payments, and a greater return on investment for home repairs. 

Know Difference Between Secured And Unsecured Home Improvement Loans

A secured loan has an asset leveraged as collateral. Home equity loans, HELOCS and cash-out refis are all secured loans that use the borrower’s home as collateral. Personal loans, on the other hand, are unsecured, meaning there is no collateral offered. Using your home to secure a loan means that the lender can reclaim their money by foreclosing on your home. Access to this valuable asset lowers their risk and makes them more willing to offer more advantageous rates.

Although leveraging your home is certainly taking a risk, if you’re considering taking out a large loan, it could save you thousands (or even tens of thousands) of dollars to lower your rate via a secured loan. If you have significant equity in your home and feel confident that you can afford the increased payments that will result from a home equity loan, HELOC, or cash-out refi, they are likely a much better choice than a personal loan. If that doesn’t describe you, however, don’t fear! Some very strong personal loan options exist. 

Secured Home Improvement Loan Options

Home equity loans: A home equity loan is a type of second mortgage in which homeowners borrow against the equity they have built up in their home. The loan is typically fixed rate and is issued as a lump sum, in contrast to a HELOC.

HELOCs: A HELOC is also a second mortgage, but one that works more like a credit card. You can draw money out of your “credit line” any time you want. They tend to have variable interest rates.

Cash-out refis: A cash-out refi is a type of refinance. Unlike the two options listed above, you will only have one mortgage when you are done. If you refinance for home improvements, you’ll be replacing your existing mortgage for one that’s larger than what you currently owe on your house in exchange for cash. Ideally, a cash-out refi will be done when you would be able to refinance to a lower rate. You then create a new mortgage that has a slightly higher interest rate due to the higher loan amount.

Unsecured Home Improvement Loan Options

Home improvement loans: Many personal loans are packaged as home improvement loans in today’s market. The upside to choosing one of these options is that their caps are generally set with home improvements in mind.

General personal loans: Although there’s no downside to choosing a personal loan that’s marketed as a home improvement loan, there’s also no reason you need to. Your loan shopping can include personal loans that aren’t marketed as personal loans as well as those that are.

Start Your Next Home Project Today.

Discover your personal loan options with just a few clicks.

Compare Home Improvement Loan Options

There are several key features to consider as you compare loan options. Choosing the right home improvement loan means finding one that will be an ideal fit for your personal needs, your financial situation, and your credit score. We’ve identified the six key features that you should look at when evaluating a potential loan for fit.

Loan Cap

The size of the loan you can take out will vary depending on the type of loan and the lender you choose. Look at the loan cap to make sure that the amount will meet your needs. Typically, you can expect to be able to borrow $1,000 – $50,000. Some lenders, however, may go up to $100,000 or more.

For cash out refis, home equity loans, and HELOCS, you will be able to withdraw approximately 80% of your home’s value minus the amount you still owe.

Loan Term

The loan term refers to the length of time the loan will last. Loan terms can vary widely. You can expect a range from 2 – 12 years. If you think there’s a possibility that you’ll want to repay your loan early, you’ll want to make sure that there is no early repayment fee.

Credit Rating Requirements

You’ll want to make sure that the credit requirements match your credit score. Some personal loans consider other factors in addition to credit score, while others require a good to excellent score (think around 680). Keep in mind, though, that the lower your credit score is the more likely you are to be paying a high interest rate on your loan. Even if you can find a lender that will provide home improvement loans for individuals with lower credit ratings, it may be worth saving up for the repairs yourself if your credit score won’t let you get a loan at an APR below 6%.

Annual Percentage Rate (APR)

Your APR is the cost each year of your loan. This includes both interest and fees. It’s considered a more accurate way of measuring the cost of a loan than a simple interest rate. APRs can vary widely depending on the loan type (loans that use equity tend to have lower APRs), the lender, the loan term, and your credit score. They are typically much lower if you use home equity to secure your loan. Again, we recommend trying to keep your APR at 6% or below to avoid a debt spiral.

Tax Benefits

One advantage of a home improvement loan that uses home equity is that it is typically tax deductible. If you’re planning to use your equity for renovations that add value to your home, you can also look into whether these renovations will qualify as a capital improvement. If so, these renovations may be sales tax exempt and they can likely help you avoid paying capital gains tax when you eventually sell your home. Personal loans do not come with tax benefits.

Time To Get Funds

The time it will take to secure your loan will vary widely depending on the type of loan you choose. Any loan that uses home equity will take longer than a personal loan. Home equity loans and HELOCs generally take two weeks to a month, while cash-out refis can take a month or longer.

Time To Get Funds

The time it will take to secure your loan will vary widely depending on the type of loan you choose. Any loan that uses home equity will take longer than a personal loan. Home equity loans and HELOCs generally take two weeks to a month, while cash-out refis can take a month or longer.

Sometimes, home improvements are urgent. If it’s because they’re critical repairs (for example, your roof is leaking badly), you should look into a Title I loan, (visit the “Federal Programs” section of our guide for more on this). If you’re racing to get those renovations done in order to sell your home, you should do your research to make sure that this is necessary. This will likely include talking to an experienced real estate agent. If it’s simply that you want to expedite the process, it may be worth delaying a little longer to get a better rate.

Personal Loan, Home Equity Loan, Cash-Out Refi, Or HELOC?

We’ve created an at-a-glance comparison of the various loan options available. All of these factors should be considered, and researched in more depth, before you decide on a financing option.

 

Tax benefits if used for home improvements?

Time to get funds

Fixed rate?

Closing costs?

Current average annual percentage rates (APR)*

Personal Loan

No

As little as one day

Yes

No

4-36%

Home Equity Loan

Yes

2 – 6 weeks

Yes

2 – 5% of loan amount

5%

Cash-Out Refinance

Yes

30 – 45 days

Yes, if you refinance to a fixed rate mortgage

2 – 5% of loan amount

3%

HELOC

Yes

2 – 4 weeks

No

No

5%

 

*APR averages are subject to change.

Home Improvement Loan Rates

As the table above shows, APR varies so widely that we really can’t say much about the general rates to expect. You’ll have to do your own research for any option that you pursue. That said, we think an APR of around 6% is a good benchmark for both secured and unsecured home improvement loans.

Start Your Next Home Project Today.

Discover your personal loan options with just a few clicks.

FAQS

I Just Moved In. How Do I Finance Renovations?

If you just moved into your home, it may be more difficult and less desirable to use home equity as collateral. You should definitely consider looking into the federal programs listed below to see if you qualify, as those options could help you get a low rate even with less collateral. It might also be time to look into a personal loan. Or, perhaps you’ll want to wait and save up so you can fund the repairs yourself.

What Credit Rating Do I Need To Get A Good Rate?

You’ll probably want your rating to be around 680 for a personal loan, home equity loan, or HELOC, but don’t take that as set in stone. If you can do a cash-out refi, you will be able to secure your loan with a lower credit rating than you would otherwise (likely around 620). The credit rating you need will depend on many factors, from the lender you choose to your employment situation. You should contact several lenders to find out what they’ll require and compare options.

Is A Home Improvement Loan A Better Deal Than A General Personal Loan?

These loans typically do not differ from other personal loans in any substantial way: there is likely not a special home improvement discount, and there will not be restrictions regarding what you can use this money for.

What Can I Use A Home Improvement Loan For?

If your home improvement loan was a personal loan, that money can be used for anything.  Minor repairs, additions – the sky’s the limit. There’s not even anything stopping you from changing your mind after taking out this type of home improvement loan and using it to fund a vacation or any other large purchase (though this would not necessarily be the most financially savvy choice, as these types of purchase are much less likely to provide a return on investment). There is also nothing stopping you from using a personal loan that has not been designated as a “home improvement loan” for home improvement.

Cash-out refinances, home equity loans, and HELOCs are also flexible options that don’t have to be used for home improvements. However, there are additional tax breaks available if the money from these three options is used for certain types of home improvement, so you should research this carefully.

Federal Programs

So, you want a loan to renovate your home but lack the credit rating required to secure a good APR on a personal loan. You are also worried about getting approval for a home equity loan, HELOC, or cash-out refinance due to your credit rating and/or lack of home equity. It’s very possible that federal programs could help. The Federal Housing Administration will back loans so that private lenders can lend to people with lower credit without taking on substantial financial risk. We’ve outlined a few popular options.

FHA 203(k) Rehab Loans

FHA 203(k) loans, like most low money down home loans, are backed by the Federal Housing Administration. These loans allow home repairs to be bundled together with a mortgage. Although FHA 203(k) loans are most commonly used by people purchasing homes in need of repairs, it is also possible to refinance an already purchased home to an FHA 203(k) loan. You will be able to choose between a limited 203(k) refinance, which provides up to $35,000 for repairs, or a standard 203(k) refinance, which requires that projects total $5,000 or more and that you work with a licensed general contractor.

Requirements:

  • A credit score of 580 or higher
  • A home that is at least a year old
  • A home that falls within the local FHA mortgage limit

Note that lenders may have additional requirements and fees that exceed the basic rules of the FHA 203(k), so you should speak to any prospective lender about their terms. However, the FHA does require lenders to offer loans at competitive rates.

Energy Efficient Mortgages

Like the 203(k) rehab loan, the Energy Efficient Mortgage (EEM) program is backed by the FHA. The EEM program can be used to purchase a home that is already energy efficient, but it can also be used to finance improvements to an existing home that will make it more energy efficient. If you’re looking at purchasing solar panels for your home, thermostats or insulation, this could be a great financing option.

Note that lenders may have additional requirements and fees that exceed the basic rules of the FHA 203(k), so you should speak to any prospective lender about their terms. However, the FHA does require lenders to offer loans at competitive rates.

Title I Loans

This is an option to consider if you need to make critical improvements in order to make your home more livable. These would include repairs to a home’s electrical wiring, heating, plumbing and roofing. Again, the FHA will back this loan to help you secure a fair market rate from your lender.

Start Your Next Home Project Today.

Discover your personal loan options with just a few clicks.

The Bottom Line: It Pays To Do Your Home Improvement Loan Homework

Whether you choose to use home equity to fund your loan or decide to fund your renovations through a personal loan, carefully researching terms, rates, caps and more will help guarantee that you have chosen the right loan for your situation. If you’re interested in a personal loan, you can get started with Rocket Loans® today.

Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.