What Type of Loan is Best for Home Improvements?

If you have home renovation plans on the horizon but don’t necessarily have the cash in your savings to pay for it in full, there are loan options such as home improvement loans to help you finance the cost of upgrades and maintenance. The type of loan that is best for you depends on your timeline, budget, credit score, and repayment terms that make the most sense for your financial situation. 

Here are the different kinds of home loans that are best for home improvements. 

1. Home improvement loan

A home improvement loan can be used for home renovations such as a kitchen or bathroom remodel. It can also be used for smaller, but still costly additions, such as energy efficient windows or solar panels. 

Here’s what you should know about home improvement loans:

• They don’t usually require you to put down collateral, such as your home or car. This is a good thing, in the event that you can’t repay the loan—you won’t lose your house, car, or other assets.
• Because you don’t have to put down collateral, home improvement loans may come with higher interest rates than secured loans such as a HELOC or home equity lines of credit (which require collateral). Not putting down collateral is viewed as more of a risk for lenders. Your interest rate will depend on your credit score.
• They typically have fixed APR and monthly payments which means you know exactly what the full cost of your loan is. The predictability in knowing your monthly payments and interest rate can help you budget.
• Once approved, you can get the funds deposited directly into your bank account—sometimes in as fast as one business day.**

2. Home equity line of credit or HELOC

Home equity lines of credit is a loan that works similar to a credit card. Borrowers are loaned a certain amount, pay it down, and may then borrow again—similar to using a credit card and make monthly payments. HELOCs can offer more flexibility because you don’t have to use the entire amount you’re approved for. You only use what you need and the credit line is available for up to 10 years. 

Unlike a credit card, a HELOC is borrowed money from a lender, so you have to pay it back just like you would any other loan. 

You must have at least 15 to 20 percent equity in your home to be able to go this route. The amount you qualify for depends on how much home equity you have.

Here’s what else you should know about HELOCs:

• The interest rates are adjustable, which means they can change over the life of the loan. However, the interest is only due on the balance, which is the amount you’ve used, rather than the entire credit line. This could help you save some money over the life of the loan.
• Because HELOCs are adjustable, the lender can change the terms of the loan. Let’s say your credit score takes a dip for whatever reason, then the lender can reduce the amount you’re allowed to borrow.
• These loans are a good option if you have smaller renovation projects that are ongoing but aren’t as expensive as a complete overhaul of your home.
• The set loan terms to repay the loan are usually between five and 20 years.

3. Mortgage refinance

With interest rates being low, refinancing is a popular option for homeowners to save some money on their mortgages. Refinancing frees up extra cash, either through lower monthly mortgage payments or through a cash out refinance in which you’re borrowing against the equity in your home.

When you refinance, your current mortgage is replaced with a new one, with a new interest rate. You essentially gain the difference if the new loan is larger than the old one—this difference can help fund your home improvement. 

Here’s what you need to know about refinancing your mortgage: 

• Refinancing only makes sense if you can secure a lower interest rate.
• Refinancing may be a better option than a HELOC, as long as you plan to stay in your home for more than five years to offset the cost of fees that you’d pay for the refinance. If you plan on moving before five years or if your current mortgage rate is already low, a HELOC might be better.
• Since refinancing involves pulling out a brand new loan, the fees of transacting may be high—this includes an appraisal, origination fees, taxes, and other closing costs.
• If you don’t refinance for a shorter term, you’re essentially extending the life of your loan, making it more costly for you in the long-run.

4. Credit cards

Using a credit card to fund your home improvement projects is another option. 

Unlike the other loans listed, credit cards typically come with higher interest rates. The average credit card interest rate is almost 18 percent for new accounts and 14 percent for existing accounts. Going this route may be expensive, unless you have plans to pay your cards off each month. 

Here’s what you need to know about credit cards:

• There are zero percent introductory credit cards, which may give you 12 to 20 months to pay back the card without incurring interest. This is a good route, but only if you can pay it off before the promotional timeframe ends.
• You can earn rewards, miles, and points on your credit cards for big purchases. Being able to grab these rewards from spending on a renovation is great, but only if you have the cash to pay it off each month.
• There’s no waiting around to get approved if you’re planning on using your existing cards to make purchases. This is useful if you have a timely project that needs to be done—such as a burst pipe.
• Keep in mind that if you don’t have high limits for your cards, maxing them out or getting close to maxing them out won’t be good for your credit. 

Bottom line

Financing a home improvement project means figuring out which loan is right for your situation and budget. 

The most important thing is having a solid plan that outlines how much the projects will cost and how quickly you can pay off the loan. Securing a lower interest rate is always best, and staying vigilant about your credit score is also important. 

** If you accept your loan by 5pm EST (not including weekends or holidays), loan funds will be sent to your designated bank account on the next business day, provided that such funds are not being used to directly pay off credit cards. Loans used to fund education related expenses are subject to a 3 business day wait period between loan acceptance and funding in accordance with federal law.