Best Loans For Home Improvements

Upgrading your home makes your space more attractive and functional, and improves its value, too. But if you don’t have thousands in cash to cover renovation costs, you can get a loan for your home improvements instead. There are several different ways to borrow money to finance your home renovations. The best choice for you depends on a few factors, including your budget, the equity you have in your home, and current interest rates.

Overview

Key Takeaways

• The best loans for home improvements depend on the amount you need to borrow, how long you need to pay it back, and how comfortable you are using your home as collateral.
• Most homeowners borrow using home equity loans or HELOCs because they offer lower interest rates and larger loan amounts than unsecured loans.
• Cash-out refinancing and FHA 203(k) loans are both options that roll your renovation costs into a new mortgage.
• Credit cards and personal loans work well if you need quick funds to pay for smaller renovations and don’t want to put up any collateral.

What is a home improvement loan?

A home improvement loan is a way to borrow money to pay for repairs, upgrades, and other renovations. It's useful when you can't — or don't want to — use cash to pay for the changes to your home. Homeowners often use a home improvement loan for things like:

• Kitchen remodels
• Bathroom remodels
• Painting or wall treatments
• New flooring
• Utility upgrades
• Roof and siding repair or replacement
• Basement renovations
• Home additions
• Accessibility enhancements
• Decks and patios
• Landscaping
• Pool installation

There are many loan types to choose from for a home improvement project; some are secured, or backed, by using your home as collateral, and others are unsecured. The best loan for home improvements is the one that you can comfortably afford, so make sure you know your budget and how much you need to borrow to complete your project.

Best loans for home improvements

The best type of loan for home renovation depends on a few different factors, including your credit score, the amount you need to borrow, and how much time you need to pay it back. Let's take a look at the best loan options for your home renovation project.

1. Home equity loans

After you've owned your home for a time, you'll typically have built up some equity. Equity is the difference between what your home is worth and how much you have remaining on your mortgage. A home equity loan lets you borrow against the equity you've already built in your home. They usually have fixed interest rates and fixed monthly payments, and you receive the money all at once up front, in a lump sum.

Pros

• Predictable, fixed payments
• Interest rates are lower than unsecured forms of credit

Cons

• Must borrow everything in a lump sum
• Your home is used as collateral for the loan

2. Home equity lines of credit (HELOC)

One of the best loans for home improvements is a home equity line of credit, or HELOC. A HELOC works a little differently than a home equity loan. Instead of receiving the total amount borrowed as a lump sum, you get access to a line of credit that you can draw against and then repay, similar to a credit card. There's usually a draw period of several years and then a repayment period, where you repay what you borrowed with interest.

Pros

• Opportunity to withdraw funds, repay them, and withdraw again for a period of time
• Lower interest rates than credit cards or personal loans
• Interest can be tax-deductible when used for home improvements (consult your tax professional for specifics)

Cons

• Rates are typically variable, which means they could go up or down over time
• Payments are variable, too, making it harder to budget
• Your home is used as collateral for the loan

3. Cash-out refinance

Another way to access cash for your home renovations is to refinance your home using a cash-out refinance. This loan replaces your existing mortgage with an all-new one, but for a larger amount. You take the difference in cash, which you can use to pay for home improvements.

Pros

• Just one payment for both the mortgage and the home improvement costs
• Opportunity to secure new terms for your mortgage

Cons

• If your current mortgage rate is lower than the refinance rate, it may not make financial sense to refinance
• You'll need to pay closing costs, just like with any new mortgage

4. FHA home improvement loans

The Federal Housing Administration backs FHA 203(k) loans, which are mortgages specifically designed for home improvements. You can use this loan to buy or refinance a home and roll all your renovation costs into the mortgage. You can pay a contractor to make improvements, or you can make the improvements yourself.

Pros

• More flexible credit requirements than other types of home loans
• 203(k) loan can be used to refinance a home

Cons

• 203(k) loan must be used to purchase and fix up your primary residence
• You'll have to pay mortgage insurance premiums (just like with a regular FHA loan)
• Your home is used as collateral for the loan

5. Personal loans

Personal loans are also sometimes called signature loans, because they are not backed by collateral — just your signature. Because you don't have collateral on this type of loan, they tend to have higher interest rates and lower loan amounts than your other options. They have fixed interest rates and fixed payments, making it simple to budget around.

Pros

• Rates tend to be lower than credit cards
• Ideal for borrowing smaller amounts than what you can get with other types of home or home equity loans
• No collateral required

Cons

• Loan amounts may be too small for big renovation projects
• Rates tend to be higher than secured loans for home improvements

6. Credit cards

Depending on the project, you might simply use a credit card. Credit cards are best for smaller renovations, like DIY projects where you just need some materials from the home improvement store. That's because they usually have very high interest rates, which can skyrocket your costs if you don't pay your balance in full by the due date. Your credit limit may also be too low to cover all of your costs, depending on the project.

Pros

• Convenient and flexible way to finance small projects
• No collateral needed
• Some cards have 0% financing offers that could help you save on interest

Cons

• Higher interest rates compared to other loans for home renovations
• Credit limits may be too small for big renovation projects

Deciding on your best option

To choose the best type of loan for your home renovation, think about your needs. Are you considering:

• A big project? You'll need a home improvement loan that offers a large amount. Consider a home equity loan or HELOC, cash-out refinance, or possibly an FHA rehab loan.
• Tapping into home equity? A cash-out refinance, home equity loan, or HELOC are a few common ways to use your home equity to finance home upgrades.
• Fast funding? The fastest way to get money for a home improvement project is via credit card or personal loan. Or online lenders like AmeriSave can help you quickly process a home equity loan.
• A small loan amount? If your project is relatively small, you could use a personal loan, HELOC, or credit card.
• Buying a fixer-upper? You might want to consider an FHA home improvement loan, which lets you roll the purchase and the improvements together into one.

How to get a home improvement loan

Ready to get started on your home renovation? AmeriSave can help you find the best loan for home improvements with just a few clicks:

1. Choose how much equity you'd like to use or select a loan amount that fits your project.
2. Enter your credit score range.
3. Provide some details about yourself and your home.
4. Get a quick quote with AmeriSave to see your personalized rates for a cash-out refinance or home equity loan.

When you're ready to move forward, you'll complete a formal loan application, including uploading some financial documents to verify your income and debts. AmeriSave offers quick quotes and approvals, so you can get started on your home renovations as soon as possible.