Home Improvement Loans: Options, Requirements, and Fees

Written by Crystal KellyUpdated: 6th Jan 2022
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Like many homeowners, the idea of increasing value and appeal to your home with updates and renovations is exciting but financially daunting.

A new kitchen remodel, even the budget-friendly ones, can cost tens of thousands of dollars.

New flooring throughout your home, updated gutters and exterior paint, and remodeled bathrooms are also costly. Fortunately, there are quite a few home improvement loans you can tap into the finance the expense and worry less.

What Are Home Improvement Loans?

Home improvement loans are loans funded to improve or repair your home and are meant to assist homeowners in financing anything related to updating your home, new roof, repairs, and updates alike.

Necessary repairs such as updating your plumbing are included and creating rooms and spaces that are beautiful and appealing, even if they aren’t necessary.

The value of your home increases with your updates and repairs, usually about 70-75% of what you spent to make the update, but some upgrades can return dollar for dollar or more.

>> More: Best Home Improvement Loans

Types of Home Improvement Loans

Common options for these loans include personal loans, cash-out refinance loans, home equity loans, and home equity line of credit (HELOC). There are additional options to fund your home improvement projects as well.

Home Equity Loan

A home equity loan is a fixed-rate loan that allows you to borrow against the equity you’ve already established in your home.

If your home is worth more than what you owe on it, you have equity. That dollar amount factors into which home improvement loans are right for you, including home equity loans.

This type of loan creates a second mortgage on your property, so you will have two payments: your mortgage payment and the home equity loan payment.

This is a good option for those with plenty of home equityand who need the loan for a one-time project.

You’ll also want to make sure that the renovation budget is pretty well set; you can’t get more money out of a home equity loan if the cost of construction or remodel increases on you.

A home equity loan uses your home as collateral to secure the loan. This means if you cannot repay the loan, the bank can take your home to cover the loss.

On the flip side, a benefit to the home equity loan is that you are often offered better, fixed interest rates because it is backed by the home and against the equity in your property. A home equity loan can also be tax-deductible in some cases.

HELOC (Home Equity Line of Credit)

A HELOCloan is a loan acquired through a bank based on the equity in your home, and much like a home equity loan, this is collateralized against your house as a second mortgage. There are significant differences between the two, though.

A HELOC is dispersed as a line of credit. This means that you take out a loan for a pre-approved amount, and you can withdraw from it as needed within a set draw period (or timeframe), pay it back, and draw from it again. This loan type works much like a credit card in that sense.

This can be beneficial for someone with equity in their home, who knows they need the loan or line of credit but isn’t certain how much they need.

Another point to consider; a HELOC has an adjustable interest rate, which can fluctuate during the loan period.

However, you only pay interest on the amount you’ve borrowed or taken out, not the entire line of credit.

Additionally, you’ll only pay interest while in the draw period. The principal and interest payments do not begin until after the draw period.

HELOCs can be a good choice if you aren’t sure how much the renovation will ultimately cost. This type of loan can also be particularly useful if you plan to sell your home in the time frame of your draw period; you only pay interest during this time and may be able to renovate your home to sell it, paying only interest on the money you’ve borrowed.

The second loan amount will have to be paid off at the time of the sale, but it keeps you from going out of pocket for these costs. Some draw periods can be as much as ten years.

>> More: Best HELOC Lenders

Personal Loans

A personal loan is not secured by your home but rather on your credit score, income abilities, and approvals.

A lender can, if you qualify, offer you a personal loan to fund your home improvement projects, and if you fail to repay the loan, your credit will suffer, but your home will not be up for grabs.

Personal loans can be a faster option for some, and most have limitations on terms such as five to seven years.

If your credit is strong, you might even get a better interest rate with this option. A personal loan option is good for those who need smaller loans for smaller projects and have the credit to support a good interest rate.

>> More: Best Personal Loans

Credit Cards

Charging a remodel to your credit card is another way to fund your renovation project. It is often the fastest option but not always the best choice if your project is too expensive.

Most remodel and updates (especially for kitchens and bathrooms!) can run twenty, thirty, fifty thousand dollars and more.

A credit card will likely have the highest interest rate, but if you can apply for a card with a zero percent introductory rate, pay back the balance within that timeframe, you’ll be able to do it without paying interest.

Another hurdle for this option is that most cards will not have enough credit limit to accommodate a medium to large size upgrade or remodel.

Cash-Out Refinance

A cash-out refinance differs from home equity loans and HELOCs. In this option, you basically refinance your home and secure a new, larger mortgage.

The amount you are approved for regarding your renovation is added to what you owe now and then bundled and refinanced into one new mortgage.

This loan option is tied to the amount of equity you have in your home, and you can choose to use the funds for whatever you want. It doesn’t always have to be home improvements.

If you can secure a lower interest rate than what you currently have, this could be a viable option for your remodel needs.

You’ll have a bigger mortgage, but the savings in the interest rates could help offset the higher monthly payments that you’ll now have. You also have options to adjust the term or length of the loan you carry.

These loans generally have higher closing costs that apply to the full loan amount, not just the cash-out amount.

Interest rates will be key in making this type of loan work in your favor, but it’s worth considering and doing the math.

Government Loans (Title 1)

Government home loans or Title 1 Loans are issued by The Department of Housing and Urban Development. These loans can often help a homeowner finance a renovation or repair at very little expense.

Issued by the government, there are specific requirements that vary by state. They often require that you do not sell the home for a lengthy period, sometimes as much as ten years.

If you intend to make your home more energy-efficient, you may be eligible for energy-efficient loans and mortgages.

FHA 203(K) Loan

Another government-backed loan program is the FHA 203(K) loan. This loan gives you a mortgage and renovation budget wrapped into one loan, but it’s done at the time of purchase.

These are good options if you are buying a home that needs rehab or a fixer-upper. The interest rates are often pretty low, especially right now, and down payments are also low.

The FHA 203(K) requires that you use the renovation money specifically for the home improvement project(s), and these costs must be at least $5,000.

How Can I Get a Home Improvement Loan?

Shop around for a lender, and once you’ve decided on who you’ll want to apply with, have these documents and information ready.

Most mortgage lenders will require this information, and some will require more. Make sure you ask what is needed of you to qualify for the loan.

  • Proof of income
  • How much you want to borrow
  • Your renovation/home improvement plan
  • Your credit score and credit history
  • What type of property are you improving (single-family residence, condo, etc.)
  • Down payment (this varies on the loan type and lender)
  • A home appraisal (current)

Some of these requirements are gathered and completed during the loan process, so it isn’t necessary to have them upfront, but they will likely be required.

What is a Good Credit Score for a Home Improvement Loan?

Depending on the type of loan you want to apply for, your credit score will almost definitely factor into your approval and interest rate.

The credit score you’ll need will vary between these loan options. For example, an FHA 203(K) loan will require a 620 or higher.

A Home Equity Loan and HELOC will require a credit score of 660 and higher. For Cash-out refi’s, you’ll need at least a 620 score.

If you choose to use a personal loan or apply for a credit card to handle your home improvements, you’ll need a much higher score; somewhere in the mid-700’s.

Remember, interest rates matter, and the higher your credit score, the lower your interest rate.

Bottom Line: Home Improvement Loans

A renovation or home improvement project doesn’t have to be put on hold because the out-of-pocket cost can be so high.

There are multiple financing options available for your situation and renovation needs. Figure out where you stand regarding credit, income, and equity in your home.

Then research these options for one that fits your needs! Make sure to speak with online mortgage lenders to understand your options.

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Cris Kelly
Crystal Kelly

Crystal Kelly is an editor and writer specializing in personal finance. As a renowned journalist, she contributes to multiple leading financial education and real estate publications. She attended the University of Maryland where she majored in English and minored in Art History. Hailing from Shoreacres, TX, Crystal provides content that helps you make simple financial decisions with confidence. Her area of expertise spans mortgages, loans, and credit cards.