Home Improvement Loans
What You Should Know
- There are six types of home improvement loans.
- Secured loans have a lower interest rate but missing payments can result in foreclosure.
- Unsecured loans have a higher interest rate because there is no collateral.
- The best loan depends on your home equity, repayment preferences, and project length.
Home improvement loans can be a great source of funding to cover the costs of renovating, remodeling, and fixing your home. Most people think their only option is a personal loan; however, that is not the case.
You can now get various loan options from federal programs to a home equity line of credit. Home improvement loans are flexible with rates, repayments, terms, and loan amounts. There are six types of home improvement loans, each with different guidelines, eligibility, and rates.
Interest Rates on Home Improvement Loans
The Best Home Improvement Loans
The best loan for your home improvement depends on your finances and the objective of the loan. Each of the six home improvement loans are briefly introduced before diving into more detail in the following sections. Additionally, clicking on each loan summary jumps you to the respective part of the article. Below the introductions, you can find suggestions based on your objective.
1. HELOC: Second mortgage secured by your home equity. Only pay interest on the amount you withdraw.
2. Home Equity Loan: Lump-sum second mortgage secured by your home equity. Payments and interest are due immediately.
3. Cash-out Refinance: Replace your existing mortgage with a larger one and keep the lump-sum cash difference. This option has the lowest interest rate but highest fees.
4. Personal Loans: Unsecured lump-sum loan with a higher interest rate. Has a smaller payback period.
5. Federal Programs: Varying government loans and grants.
6. Credit Cards: Unsecured revolving loan with the highest interest rate. Only pay interest on the amount you withdraw. Has an interest-free period of 25 to 30 days.
| Objective | Best Options |
|---|---|
| Single large project |
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| You have low cash, but high home equity |
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| You have low home equity, or don’t want to collateralize your home |
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| Access to quick cash |
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| Increasing home suitability |
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The Six Home Improvement Loan Options
| Average Rate | Term Length | Maximum CLTV | |
|---|---|---|---|
| 1. Home Equity Line of Credit (HELOC) | 8.00% | 10 to 30 years | 85% |
| 2. Home Equity Loans | 8.50% | 5 to 30 years | 85% |
| 3. Cash-out Refinance | 7.20% | Up to 30 years | 80% |
| 4. Personal Loans | 12.00% | 1 to 5 years | N/A |
| 5. Federal Programs | 8.00% | Varies | Varies |
| 5. Credit Cards | 20.00% | N/A | N/A |
1. Home Equity Line of Credit (HELOC)
| Pros of HELOCs | Cons of HELOCs |
|---|---|
| No interest on unused amounts | Unpredictable payments due to variable rate |
| Interest-only payments | At least 20% home equity is required |
| The lender can waive HELOC fees | Payment default can result in foreclosure |
| Ability to tax deduct interest | |
| Doesn’t affect primary mortgage |
A home equity line of credit (HELOC) allows homeowners to borrow cash against their home equity, using the home as collateral. It is a second mortgage that won’t affect your primary mortgage. HELOCs function like a credit card, where a loan limit is pre-decided, and the borrower can access funds from the HELOC, pay them back and choose to take the funds out again.
HELOCs are structured into the draw and repayment period. During the draw period, you are free to take funds out of the HELOC and are only required to pay back interest on any outstanding balance, not the principal. Once the draw period is over, the repayment period starts.
During this period, you can no longer borrow funds from the HELOC. Instead, you must pay back any outstanding balance, which becomes an amortized loan with regular monthly payments. To calculate how much your monthly HELOC payments will be, use our HELOC payments calculator.
| Lender | HELOC Rates (APR) | Max. CLTV |
|---|---|---|
| Variable Rate: Starting at % | 80% |
Last updated January 1, 1970. Rates are for informational purposes only.
Tip: Calculating Loan-to-Value (LTV) Ratio
The maximum amount that you can borrow from your home equity depends on your loan-to-value (LTV) ratio. Most lenders allow up to an 80% to 85% LTV ratio, meaning you must have at least 15% to 20% home equity before the HELOC, HELOAN, or cash-out refinance.
For example, suppose you own a $400,000 home with a $200,000 mortgage balance. In this case your loan to value is 50%. If your lender allows for a maximum 80% LTV, you could borrow an extra 30%, or $120,000.
2. Home Equity Loan (HELOAN)
| Pros of Home Equity Loans | Cons of Home Equity Loans |
|---|---|
| Competitive interest rates | Payments due immediately |
| Predictable monthly payments | No interest-only payments |
| The lender can waive fees | Requires a credit score greater than 670 |
| Ability to tax deduct interest | Potential for home foreclosure |
| Doesn’t affect primary mortgage |
A home equity loan allows homeowners to borrow a lump-sum amount against the equity they own in the home. It is similar to a HELOC as the house is collateral. However, in a home equity loan, you receive one amount at the beginning and cannot borrow more funds.
As the home is collateral, lenders can offer competitive rates as they have a lower risk. Home equity loans are great for one-time large projects such as building a new roof or remodeling the kitchen. You can estimate the costs of these projects by using a roofing calculator or a stair calculator.
| Lender | HELOC Rates (APR) | Max. CLTV |
|---|---|---|
| Variable Rate: Starting at % | 80% |
Last updated January 1, 1970. Rates are for informational purposes only.
3. Cash Out Refinance
| Pros of Cash-out Refinances | Cons of Cash-out Refinances |
|---|---|
| Lower mortgage rate | Refinance fees |
| Single mortgage payment | Home is collateral |
| Up to 30 years term | Private mortgage insurance (PMI) is required if LTV ratio > 80% |
| Interest payments can be used as tax deductions | Debt-to-income (DTI) ratio needs to be < 43% |
| Doesn’t affect primary mortgage |
A Cash-out refinance is the process of borrowing additional funds when you refinance your existing mortgage and pocketing the cash difference. For example, suppose you have an outstanding mortgage balance of $300,000. In that case, you can refinance your mortgage to $315,000 and cash out $15,000 for home improvements.
The new loan will replace your existing mortgage. As a result, your interest rate, loan length, and monthly payment may change. Many people refinance into lower interest rates to decrease their monthly mortgage payments or the total amount of interest paid.
When you cash out refinance, you must pay high mortgage replacement fees. As a result, performing one is best for big-ticket home improvements. After finalizing the loan, you’ll receive a lump sum payment upfront. Your mortgage payments will immediately change. In some cases, they may increase. However, performing a cash-out refinance is typically the lowest interest rate option. To calculate the maximum amount you are eligible to borrow, use our cash-out refinance calculator.
| Sample Cash-Out Refinance Lender | |||
|---|---|---|---|
| Lender | Minimum Credit Score | Loan Amounts | Maximum LTV |
| 620 | N/A | 80% | |
4. Personal Loans
| Pros of Personal Loans | Cons of Personal Loans |
|---|---|
| Quick application process | Higher interest rate |
| No collateral required | A smaller maximum borrowing amount |
| Perfect for unforeseen repairs | Shorter repayment period |
| No tax deductions on interest paid |
A personal loan is a loan where a lump-sum amount is borrowed without any collateral. If you do not own enough home equity and have an LTV ratio greater than 80%, then a personal loan will be the best option for your remodeling needs.
Personal loans can get you the funds relatively quickly as the home is not part of the loan. However, the interest rate charged on a personal loan is higher than a HELOC or a home equity loan as there is a higher risk for the lender. Personal loans can be fixed-rate or variable-rate. Fixed payments are more predictable, whereas variable-rate constantly changes with a benchmark index like the prime rate, which is connected to the Fed funds rate.
These loans usually have to be paid back within 2-5 years and have closing costs too. Personal loans are best used if you have to do an emergency repair where time is crucial, such as a heating or cooling system repair. Use our personal loan calculator for home improvements to determine your monthly payment.
| Sample Personal Loan Lender | |||
|---|---|---|---|
| Lender | APR* | Loan Amounts | Term Length |
| 5.99% to 21.74% | Up to $100,000 | 12 to 84 months | |
5. Federal Programs
| Pros of Federal Programs | Cons of Federal Programs |
|---|---|
| Low-interest rate | Strict eligibility requirements |
| Part of the mortgage | Not all lenders can make these loans |
| Several grants available |
The government offers some low-cost solutions to individuals who qualify for their home renovation programs. Different government agencies have various programs. Therefore, if you are eligible for an FHA loan, VA loan, or USDA loan, check if you qualify for additional assistance for home renovations.
FHA loans offer the FHA203(k), which is a particular FHA loan where the borrower receives their mortgage amount and an additional amount for renovations. The FHA must approve the home being purchased. It must be a home that requires renovations to ensure safety and livable standards to receive the additional amount.
The amount borrowed for renovations can go from $5,000 to $35,000, depending on the home's condition. A VA renovation loan is similar to an FHA203(k) loan, where the borrowing amount will include both the mortgage and renovation funds. Similarly, the USDA has a program known as the USDA Rural Housing Renovation Loan Program, which caters to individuals who purchase homes that require renovations.
6. Credit Cards
| Pros of Credit Cards | Cons of Credit Cards |
|---|---|
| Payment flexibility | Very high-interest rates |
| Quick application | Fee for credit card |
| Interest-free grace periods | Low borrowing limits on credit cards |
Credit cards let you borrow funds for a short period and can be great for emergency renovations that are required. You are only required to make the minimum payment to your credit card account if you are strapped for cash. Interest starts accruing on the bill if you have an outstanding balance after the last payment date.
Credit cards have relatively high interest rates compared to the other loan options because they pose a higher risk for lenders as there is no collateral. It might be wise to have a credit card ready for the projects if you need to buy extra material quickly. For example, if you calculated the amount of concrete required for the project, but the project was slightly changed, you may have to buy more concrete to ensure that the project is completed on time.
Store Credit Cards
One specific type of credit card that may be helpful for home improvements in some cases is a store credit card. These credit cards are usually issued by large stores such as Lowe's, Home Depot, IKEA, Walmart, etc. Nowadays, almost every large store has a series of cards.
However, they typically provide little value for the consumers compared to the credit cards offered by large lenders. On the other hand, some store credit cards may be beneficial for home improvement financing, especially if most of the material is bought from the store that issued the card.
In addition, all store credit cards tend to have no annual fee, which means that even if a borrower does not use them after the home improvement project, they will not need to lose money on the card fees. The following table overviews the most helpful store credit cards for home improvement projects.
| Name | APR | Credit Limit | Benefits |
|---|---|---|---|
| Home Depot Project Loan | 19.6% | $55,000 |
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| IKEA Projekt | 21.99% | $5,500 |
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| Amazon Prime Rewards | 22.24% | $30,000 |
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| Menards® BIG Card® | 24.99% | $7,000 |
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| Harbor Freight Tool | 25.99% | $2,000 |
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| Lowe’s Advantage | 26.99% | $2,000 |
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| Floor & Decor Credit Card | 29.99% | $15,000 |
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Frequently Asked Questions (FAQ)
Different loan programs have additional requirements. However, most loans will require a minimum credit score of 620.
Federal programs have different requirements. FHA 203(k) loans can go as low as 500, while VA and USDA loans do not have minimum credit score requirements.
Yes, a few loan programs are tax-deductible as interest payments on HELOCs, home equity loans, and cash-out refinances can be claimed as tax deductions. The interest payments on your mortgage through a federal loan program can also be claimed as an itemized deduction. Personal loans and credit cards cannot be claimed.
There are many different reasons a person might take a home improvement loan. It might be as simple as doing a cosmetic renovation, but usually, people choose to do it to increase the value of their home by increasing its efficiency. The following table provides insight into why people have taken home improvement loans in the last two years, according to the US Census Bureau.
| Reasons for Home Improvements | Number of Projects | The proportion of Total Projects |
|---|---|---|
| Accessibility for Elderly or Disabled | 2,253 | 14.39% |
| Energy Efficiency | 12,044 | 76.91% |
| Prepare House for Sale | 1,362 | 8.70% |
Depending on the project, the cost may vary significantly. Generally, the average cost of a home improvement project is around $4,749, although it is not a representative cost of an expected expenditure. The median price of a home improvement project is only $1,500, which means that 50% of the projects cost less than $1,500. The average cost is much larger than the median because a few substantial home improvement projects drive the average price up.
| Home Improvement Expenditures | |
|---|---|
| Median expenditures | $1,500.00 |
| Mean expenditures | $4,749.00 |
| Total expenditures × 1,000 | $521,828,933.00 |
Even though it might be useful to know the median and the average cost of every home improvement project, the cost of different items may vary greatly. For example, replacing a roof may cost much more than replacing a doorstep. Because of that, an individual trying to estimate the cost of their project should look at the average cost of every single item rather than relying on an average home improvement project cost.
| Home Improvement Median Expenditures By Project | Disaster Repairs |
|---|---|
| Earthquake | $4,000.00 |
| Tornado/Hurricane | $8,000.00 |
| Landslide | $7,500.00 |
| Flood | $7,200.00 |
| Other | $9,000.00 |
| Room Additions And Renovations | |
| Bedroom | $21,320.00 |
| Bath | $10,000.00 |
| Recreation Room | $8,167.00 |
| Kitchen | $29,040.00 |
| Other | $7,000.00 |
| Remodeling | |
| Bath | $3,300.00 |
| Kitchen | $6,000.00 |
| Exterior Additions And Replacements | |
| Attached Garage/Carport | $3,404.00 |
| Porch/Deck/Patio/Terrace | $3,000.00 |
| Roofing | $7,000.00 |
| Siding | $3,500.00 |
| Windows/Doors | $1,500.00 |
| Chimney/Stairs/Other Exterior Additions | $1,500.00 |
| Interior Additions And Replacements | |
| Insulation | $900.00 |
| Water Pipes | $648.00 |
| Plumbing Fixtures | $450.00 |
| Electrical Wiring/Fuse Boxes/Breaker Switches | $750.00 |
| Security System | $400.00 |
| Flooring/Carpeting/Paneling/Ceiling Tiles | $2,000.00 |
| HVAC | $4,000.00 |
| Septic Tank | $2,400.00 |
| Water Heater/Dishwasher/Garbage Disposal | $600.00 |
| Other Interior | $1,500.00 |
| Lot Or Yard Additions And Replacements | |
| Driveways/Walkways | $2,160.00 |
| Fencing/Walls | $1,500.00 |
| Swimming Pool/Tennis Court/Recreational Structures | $5,000.00 |
| Shed/Detached Garage/Other Building | $2,160.00 |
| Landscaping/Sprinkler System | $1,000.00 |
| Other | $2,000.00 |