As a homeowner, you can almost always find something on your property that needs fixing up or updating. Maybe it’s the middle of winter and your furnace is acting up. Perhaps a pipe sprung a leak and you’re dealing with flood damage. Or maybe your kitchen is really outdated and you’re finally fed up with it.
Whether you’re facing an emergency home repair or a planned home improvement, covering the costs can require stacks of cash you may not have. If you can’t pay for home improvement expenses out of pocket, you may need to borrow those funds instead. That’s where home improvement loans come in.
Here are some top options for home improvement loans:
The 4 types of home improvement loans
Home improvement loans aren’t one specific credit product like, say, a mortgage. Instead, there are four main loans that homeowners typically seek to cover the cost of home improvements: a personal loan, home equity loan, home equity line of credit, or a government-backed loan.
Personal loans are a form of unsecured debt that can be used to borrow as little as $1,000 up to $50,000 or more. Because the personal loan is unsecured, you won’t need to offer up collateral (such as equity in your home) to qualify.
You will, however, need to have good credit to both get approved for a personal loan and to qualify for lower interest rates. Once you’re approved for a personal loan and sign on the dotted line, your lender will disburse the loan funds to you. After that, you’ll repay the personal loan in monthly installments with payments based on your loan amount, term, and interest rate.
Home equity loans
Home equity loans are another common option to fund home improvements. These secured loans use a portion of your home equity as collateral to fund the loan. This means you’ll need to have adequate home equity against which you can borrow.
If you do have decent equity in your home, a home equity loan can be an accessible and affordable way to borrow. Home equity loans carry lower rates than other home improvement loan options. (Note, however, the added risk to the borrower — should you become unable to keep up with home equity loan payments, you could lose your home.)
The process of applying is lengthier and more involved for a home equity loan vs. a personal loan, too. You’ll need to complete additional steps to prove your home’s value and your equity, such as scheduling property appraisals or home inspections. Once you’re approved, funds are disbursed to you and you’ll repay the home equity loan in installments.
Home equity line of credit
There’s also a home equity line of credit (HELOC). This option is similar to a home equity loan, in that it relies on home equity to secure any money you borrow. This means the requirements, rates, and process of applying for a HELOC are similar to those of a home equity loan.
The big difference comes in the loan funding portion of the transaction. Instead of receiving a lump sum as you would with a home equity loan, you’ll get a home equity line of credit. This is a type of revolving credit, similar to a credit card, that you can borrow from and repay as needed during a set time, known as a draw period. You’ll make minimum payments during the draw period, and once it ends, you’ll enter a repayment period to pay back the remaining balance.
Government-backed home improvement loans
Finally, some homeowners might qualify for an FHA Title I property improvement loan for repairs required to make the home livable or useful. Plus, many state and local programs provide financial assistance to homeowners for repairs and improvements. Research your options to be sure you’re not missing any!
How to choose the right home improvement loan
Now that you know your options, how do you choose the right one for you? Here are some factors to weigh that can help you hone in on the home improvement loan that will best fit your needs.
- How much you need to borrow. Once you know how much you need, you can compare that amount to the loan limits of different lenders and loan types. If you’re unsure how much you might need to borrow or have ongoing financing needs, a home equity line of credit can be a good fit.
- How much home equity you have. This determines whether you can get a home equity loan or HELOC, and how much you can borrow.
- How willing you are to leverage your home. Taking out a home equity loan or HELOC uses your house as collateral, and you’ll need to weigh the risks and rewards of this option.
- How fast you need the funds. A personal loan will offer a much faster approval and funding process than either a home equity loan or line of credit or a government-backed loan.
- How good your credit is. Most home improvement loans will require a decent credit score to qualify, though some government-backed loans might offer more flexibility. Your credit score also affects the interest rate and potential fees you will face.
- How much you’ll pay. Home equity loans and HELOCs often provide lower rates than personal loans but can come with additional closing fees. Get rate quotes for different credit options to compare costs and terms.
- How you want to repay what you borrow. If you want flexible monthly payments, a HELOC could be the option for you. Home equity loans and personal loans, on the other hand, give you predictable monthly costs.
FAQs about home improvement loans
What type of loan is best for home improvements?
The best home improvement loan for you will be determined by your specific situation, credit qualifications, and needs. If you want to minimize borrowing costs, a home equity loan might be the way to go. But if you don’t have much equity to borrow against or need to get funds faster, a personal loan could be a better fit.
Are home improvement loans tax deductible?
The interest paid on home loans secured by your property’s value is often tax-deductible, including home equity loans or HELOCs. The IRS requires that loan funds must be used to buy, build, or improve the home they secure for interest to be deductible. You can write off interest on up to $750,000 in qualifying residential loans.
Interest paid on personal loans is not tax-deductible.
What is the interest rate for a home improvement loan?
The rate you’ll pay depends on a few factors. The type of loan you choose plays a big role, with home equity loans and HELOCs offering lower rates. Your credit score will also play a role in your home improvement loan rate; the better your credit, the lower your rates.
What credit score is needed for a home improvement loan?
You’ll likely need good credit or better to get a home improvement loan. Most (but not all) require a credit score of at least 680, according to Experian. And you’ll need a score of 700 or higher to qualify for better rates and terms.
The final word on the best home improvement loans
If you’re ready to get home repairs or improvements underway, start looking for the right financing option. Choosing the best home improvement loan is the first and one of the most important decisions you’ll make in your home improvement process.
Make sure you pick the type of home improvement loan that best meets your needs. And once you know what you want, shop around to find the best lender and terms available to you.