Best Home Improvement Loans in 2024
Best Home Improvement Loans in 2024, You can utilize home renovation loans to renovate, maintain, or repair your property. Learn how to select the right lender for your project by comparing secured and unsecured choices here.
You can obtain financing for home improvements and repairs with a home improvement loan. When you obtain a home improvement loan, you pay your contractor or purchase materials to finish the project with the loan money, and you eventually repay the loan. If you lack the money to cover the whole cost of your home renovation projects up front, a home improvement loan can be useful.
The two most popular kinds of home renovation loans are home equity loans and personal loans, but there are other choices as well, like cash-out refinancing. Loans for home renovations may be available from banks, credit unions, and online lenders.
Types of Home Improvement Loans?
The type of loan you choose will depend in large part on the scale of your home improvement project. Here are four types of home improvement loans and an overview of each one:
Home Equity Loan
A home equity loan is a second mortgage from a bank, credit union or other lender enabling you to borrow against the equity in your home. Lenders usually limit you to borrowing 80% to 85% of your home’s value. You will repay the balance with equal monthly payments over a fixed term, in addition to your original mortgage. Learn more about the best home equity loans.
Pros: A single lump-sum loan amount gives you the ability to tackle major projects at a fixed interest rate.
Cons: Qualification is more involved – with funding taking up to two months – and includes a home appraisal as well as closing costs. Since your home is used as collateral, you risk falling into foreclosure if you don’t repay the loan. Plus, your budget may fluctuate over the duration of the project, so you risk borrowing too little (or too much) in case your expenses change.
Best for: People with a clear home improvement plan and budget.
Home Equity Line of Credit
A HELOC is like a credit card because it allows you to draw funds as needed up to a limit and then repay them at a variable interest rate. HELOCs are typically limited to 85% of the equity of your home. Learn more about how to compare home equity loans and HELOCs.
Pros: Only borrow exactly what you need.
Cons: With variable interest rates, loans could be more costly than expected, especially when you consider HELOC closing costs. Like with a home equity loan, you risk losing your home if you fail to repay a HELOC. Finally, funding can take two to six weeks, so it’s not a good solution if you need money in a pinch.
Best for: People who aren’t sure what the final construction bill will be.
Cash-Out Refinance
A cash-out refinance replaces your mortgage with a new home loan for more money than you owe on the original mortgage, giving you the difference in cash. You’ll access your equity to get cash at closing, which you can use to make home improvements.
Lenders may allow you to draw out up to 80% of your home’s value. Your refinanced home loan will have a new balance, payment, interest rate and repayment terms. Most cash-out refinances have fixed interest rates. Learn more about the best mortgage refinance lenders.
Cons: With your home as collateral, you risk losing it if you fail to make payments. Because you’ll have to go through the closing process, funding can take up to 45 days (and sometimes longer). Additionally, you may not be able to secure a lower mortgage rate than what you’re currently paying, and you’ll have to pay closing costs.
Best for: People who have built a lot of equity and plan to stay in their home for a while.
Personal Loan
Using a personal loan for home improvement is like getting any unsecured loan. It’s not secured by your home, and your home improvement loan rate depends on your creditworthiness. Personal loans are usually available with fixed interest rates and in amounts from $1,000 to $100,000. Because a personal loan is unsecured, it will have a higher interest rate than a loan secured by your home. Learn more about the best personal loans.
Pros: You can qualify even if you don’t have significant equity in your home, and you don’t risk losing your home since it won’t be used as collateral. Unlike with home equity loans, HELOCs and cash-out refinancing, you won’t have to pay closing costs. Plus, personal loan funding is fast, with many lenders offering same-day or next-day funding.
Cons: Interest rates are higher than for collateral loans, and the APR you qualify for will depend on your credit score and debt-to-income ratio. You may also have to pay a personal loan origination fee, which can be up to 10% of the loan amount.
Best for: People with good credit who don’t need a lot of cash to fund their home improvement project.
How to Compare Home Improvement Lenders
criteria for eligibility: To increase your chances of being approved, find out what the lender’s minimal criteria are and prequalify. While home equity products and cash-out mortgage refinancing may necessitate a hard credit check, the majority of personal loan lenders allow you to become prequalified with just a soft credit inquiry.
Loan amounts: The maximum loan-to-value amounts apply to all home equity loans. Lenders of personal loans also have limit and minimum loan amounts.
APR: Obtain prequalified rate quotes and compare home improvement rates. When comparing loan costs and APRs, make sure you’re comparing like with like.
Length of loan: Longer term home improvement loans provide smaller monthly payments but will require more repayment over the course of the loan. Conversely, loans that have a shorter payback period will cost more overall but will have larger monthly payments.
Though your selections will vary by lender, secured loans backed by the equity in your house may provide lengthier payback terms than unsecured personal loans.
Customer service: To find out what kind of customer service to anticipate from a home improvement lender, read reviews of the lender and look through the Better Business Bureau and Consumer Financial Protection Bureau Consumer Complaint Database.
203(k) loans: Backed by the Federal Housing Administration, a 203(k) loan finances the purchase of a home and the cost of repairs and upgrades in one loan. There are also home improvement mortgages available through conventional lenders and the Department of Veterans Affairs.
Title I loans: This Department of Housing and Urban Development-backed loan finances property improvements and renovations and is capped at $25,000.
Home construction loans: A home construction loan covers the cost of building a home or a major renovation and is paid to the contractor.
Renovation loans: Some lenders give loans based on the future value of your home, after you make the improvements. These loans are best for homeowners who haven’t built much equity yet.