What To Consider Before Getting A Home Improvement Loan
A home improvement loan can be helpful if you dont have time to build up your savings, but its still an expensive option.
- Avoid taking on too much debt. If you apply for a loan you cant afford to pay off, you run the risk of taking on debt you cant manage. Make sure you budget for your repayments based on your financial situation before you apply.
- Budget for the unpredictable. Construction doesnt always go exactly as planned. If anything happens that affects the budget or schedule of your renovations, it could leave you without the money you need to finish the job. In this case, a personal line of credit may be a better way to cover unexpected costs.
Alternatives To Refinancing For A Home Improvement Loan
Not everyone has the equity to qualify for a cash-out refinance. If you need another way to make home improvements, here are a few other options:
A home equity loan or home equity line of credit can let you borrow against the equity in your home. Neither of these loans will require you to change the terms or interest rate of your existing mortgage. However, youll pay a higher interest rate than you would with a cash-out refinance, and youll take on an additional monthly payment.
Make sure you understand the difference between a cash-out refinance vs. HELOC before deciding which is better for your financial situation. Rocket Mortgage® does not offer home equity loans or HELOCs currently.
Personal loans are another option. These are unsecured loans issued and supported only by the borrower’s creditworthiness, rather than by any type of collateral. As a result, they tend to have higher interest rates. Our sister company Rocket Loans® offers personal loans for home improvement and many other uses.
Types Of Home Improvement Loans
There are several kinds of loans you can use to make home improvements. The most common are:
- Personal loans: These unsecured loans, which are featured on this page, can be used for any purpose. Interest rates are based on your credit score, and you dont have to provide collateral. This may be a good option if you want to avoid using your home to secure a loan.
- Home equity loans: These are lump-sum loans that are often used for home-related projects and needs. Your home is used to secure the home equity loan. Because of this, you can usually expect a lower interest rate than with a personal loan, but if you miss payments, your home could face foreclosure.
- Home equity line of credit : A HELOC is a revolving line of credit secured by the equity in your home. You can take money out for home-related expenses as needed, rather than as a lump sum. Your home is used as collateral for a HELOC, and youll score lower interest rates because of it.
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How To Choose The Best Home Improvement Loan
In order to determine the best home improvement loan approach, there are a few major factors to consider. Before you start, be sure that you have a realistic cost associated with the home improvement plan. Understand what it will cost, and factor eventual interest, incidentals, and changes in the market value of goods. Once you know how much youll need, and for how long you will require it, you can move forward, considering the key factors.
Interest rate
This is a significant consideration since it is literally the cost of accessing the loan service. Naturally, the lower the rate of interest, the less you will ultimately have to repay. Your credit score and borrowing history go a long way toward accessing a desirable rate of interest. The better your score, the lower the interest. However, even if you have a perfect credit score, be sure to shop around for competitive interest rates. Companies want your business, so check with a reputable online service to find out your options.
Loan Amount
The next thing to think about is how much money youll need for the loan. If you are simply redoing the roof, you may be able to take out only a few thousand dollars. On the other hand, if you are redoing your basement to pursue a tenant as a source of income, you will likely need much more. Some lenders deal only in smaller projects, so be sure to find a company that is willing to lend the amount you need.
Term Length
Eligibility Requirements
Can You Add A Cosigner?
Additional Reading
What Is A Home Improvement Loan And How Does It Work
Home improvement loans are often unsecured personal loans that have fixed rates and are usually repaid in monthly installments over several years. These loans are used to fund everything from quick fixes to more substantial renovations.
Loans on our list range from $500 to $100,000, so there’s plenty of options depending on what type of project you’re aiming to complete. You’ll get your money upfront with a personal loan, and will have to start repaying the balance plus interest as soon as you receive the money.
Your credit score will play a major part in determining if you’ll qualify for a loan with a given lender. With a higher credit score, you’ll get a better rate and are also more likely to be approved for a loan. Each lender has its own standards to determine what you’ll need to be eligible for a loan.
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Ask Your Contractor For A Loan
Your home contractor may offer a loan for, say, 12 to 18 months. Typically this is done through a third-party lender. For example, LendKey, a website that provides contractor loans, recently offered fixed interest rates from 6.74 percent to 12.49 percent, depending on the borrower’s credit. The company offers loans with terms from 3 to 15 years.
You may be able to arrange an interest-free loan through your contractor as well. However, if you’re unable to pay off an interest-free loan before the term expires, youll probably owe interest backdated to the day you signed the agreement. In this arrangement, make sure you dont lose the right to withhold payments if the contractor’s work isn’t done to your satisfaction, if that was a term of your contract.
Having a contractor also be your lender means you’ll need to vet him in both roles. Ask past clients about any problems they experienced using his financing. Check whether there are complaints about the companys financing deals with your states office of consumer affairs and the Better Business Bureau.
Where To Get A Loan To Fund Your Home Improvements
Consider a RenoFi Renovation Loan to fund your home improvements. You can borrow up to 90 percent of the future value of a home you currently own or are in the process of buying. This means you could increase your borrowing power, even if you have little to no equity in your home.
To illustrate, assume your home is worth $385,000, and you still owe $265,000, but the renovations will increase your home by $75,000. Youll be limited to a home equity loan of $81,500 as home equity loans, and HELOCs only take the current property value into consideration.
But if you apply for a RenoFi Renovation Loan, you could get up to $149,000 . Thats a difference of $67,500!
Even better, you wont have to refinance your current mortgage or get draws and inspections required for construction loans.
Use the personalized monthly payment calculator to view product offers that may be available to you. Theres no impact on your credit score, and you could qualify for a fixed or variable interest rate loan of up to $500,000, or a cash-out refinance mortgage loan of up to $2 million from a credit union partner in the RenoFi network.
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When Credit Cards Are The Best Choice
But theres an exception. If youre borrowing in the low hundreds, your cards may be your best bet. And, providing you zero your balance within a few months, even their high rates are unlikely to cause real pain.
Just watch out for one danger. Whenever your balance exceeds 30% of your cards credit limit, youre damaging your credit score. So, if necessary, make sure you spread the costs over multiple cards so that you never do that.
One more thought. Theres nothing wrong with charging tens of thousands to your cards as long as you zero your balance each month. People often borrow using personal loans or home equity loans and use the proceeds to pay off their projects card debt each month. That way they dont miss out on their cards miles, points or cash back.
Best Home Improvement Loans In June 2022
To find the best home improvement loans, we combed through interest rates, repayment timelines and fees. Here are the best home renovation loans to consider in 2022, along with loan details and profiles of borrowers they best fit:
- LightStream: Best lender for long-term financing
- SoFi: Best lender for unemployment protection
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Comparison Shop Home Improvement Loans
If youre wondering how to get a renovation loan, your mortgage lender is an obvious choice, but may not be the best one for a loan for home improvement. Most borrowers would benefit by shopping around to see where the best terms are, McBride said.
To make sure you are getting the best deal, comparison shop with several lenders, including your mortgage servicer. Requesting a pre-approval or applying for several remodeling loans wont damage your creditMcBride says the credit bureaus lump similar applications into one inquiry but it will help you to find the lowest interest rate and the best terms.
Are Personal Loans Legitimate
Absolutely. You should be safe to borrow a personal loan as long as you are dealing with a reputable lender. Find reviews of the company, look for more information, and don’t pay attention to offers that feel too good to be true. Your best bet is to find personal loans that are backed by a Member FDIC bank or NCUA-accredited credit union.
You can spot possible scams by looking out for these common signs of fraud:
- The lender doesn’t ask for your credit score or payment history.
- The lender’s website is unsecure.
- The lender guarantees approval.
- The lender isn’t open about fees.
- The lender pressures you into taking out a loan immediately.
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Personal Loans Dont Require Equity In Your Home
Second, for those who bought a house recently and just paid closing costs, a personal loan may be your only option. As the name suggests, a home equity loan requires you to not just have good credit, but have equity in your homewhich you wont have until youve been paying your mortgage for some time. In pre-financial crisis days, home equity loans were given out readily based on your homes value, but it doesnt look like these practices will be coming back any time soon80% of home equity lenders did not report any changes in their underwriting criteria in 2016, meaning your chances of qualifying for home equity loan or home equity lines of credit without having paid a significant chunk of your mortgage are slim.
Home Improvement Loans And Your Credit Report
Your credit score and report always matter when youre applying for financing. Thats true for secured loans, like cashout refinances and HELOCs, as well as personal loans and credit cards.
When you have excellent credit, you have a great shot at getting low interest rates with or without a secured loan.
A lower credit score will increase your loan rates significantly for personal loans or credit cards. Some personal loans charge up to 35% APR to less qualified borrowers.
Some unsecured loans also require high origination fees a few lenders charge up to 6% of the loan amount in fees.
You can always get prequalified with online lenders if youd like an estimate on your loan rates and fees.
Prequalification shouldnt hurt your credit score, and itll help you estimate your monthly payments.
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Alternative Ways To Pay For Home Improvements
Depending on your financial situation, you may be able to find more affordable help elsewhere, like from a local or county housing department. To see whats available in your state, start with the Department of Housing and Urban Development website. Also consider these options:
Budgeting and paying in cash
Especially for smaller projects, it can be smart to save up money to pay for home improvements with cash. You wont pay any interest or fees. Some banks and credit unions offer special, interest-bearing savings accounts that let you sock away money in a designated fund.
How it compares with a home improvement loan: If you can swing it, paying for a home renovation or repair out of pocket is the cheapest and best way to pay for home improvements. It can take time, though, to save up enough money and that can mean delaying the work.
Home equity loans or home equity lines of credit
If you own your home and have built up substantial equity, you may be able to use either a home equity loan or a HELOC to access more funds for a home improvement project than with a home improvement loan.
HELOCS operate more like a credit card. Your lender gives you a maximum amount you can draw on over a set period of time . You then enter into a repayment period, where you pay back the amount you borrowed. HELOCS come with adjustable interest rates, but also lower interest rates than personal loans.
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Which Home Improvement Loan Is Right For Me
Here are some questions to consider when deciding which type of home improvement loan is right for you. But remember, its always best to speak with a financial advisor if you need help, especially if youre thinking of tackling a very costly project.
- Do you have equity in your home? If not, you wont be able to use a home equity loan or HELOC.
- How important is it to get quick cash? Personal loans can provide faster funding than HELOCs and home equity loans.
- How good is your credit? It may be harder to get an unsecured personal loan than a secured home equity loan or HELOC if your credit isnt that great.
- How important is it to save money? Home equity loans and HELOCs often come with lower interest rates than personal loansbut youll need to consider closing costs.
- Do you need your money in one lump sum or over time? If youre paying for all of your home improvements at once, a home equity loan or personal loan may be the better option. If youre doing your project over time, a HELOC allows you to use credit as you need it.
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The Best Way To Finance Home Improvements
When it comes to any loan, the #1 Rule is alwaysshop around!
Although its not a bad idea to start with a quote from the bank that issued your first mortgage, dont stop there. Research current interest rates and terms, as well as closing costs and the other fees associated with different loans.
Dont limit your research to interest rates. Otherwise, you might end up comparing apples to oranges.
Just because a lender has the lowest rate on a cash-out refinance doesnt mean it is offering the least-expensive option. Its not uncommon for lenders offering low rates to tack on higher closing costs and other fees than the competition. In youre not careful, you could pay more for a loan with the lowest rate.
Depending on the type of loan for which youre applying, you should also:
If youd rather spend eternity on a hamster wheel than do the legwork needed to locate the right loan, consider an online service such as LendingTree.
Despite its name, LendingTree is not a lender. Its a loan facilitator. After filling out an application on its site, the company uses a computer algorithm to match you with different lenders in its network. So instead of pounding the pavement and surfing the web to find a lender with the best offering, lenderscontact you with their quotes.
Its one of the fastest, most convenient ways to comparison shop.
Based on a sampling of customer reviews, however, its obvious that LendingTree is a service that people either love or hate.
Shopping For A Home Improvement Loan
Whatever loan you choose credit card, personal loan, a home improvement loan, or other dont borrow without comparing several options. Many studies have concluded that only by getting quotes from several competing providers can you be confident that youre getting a good deal.
Home improvements can represent a sensible investment. They can make a home more enjoyable, more cost-effective, or safer. They can even add to the value of the property. One component of making this investment workable is choosing the best way of paying for it, and under the right circumstances, a personal loan could be the best option for you.
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Other Types Of Home Improvement Loans
Home improvement projects may be pricey, but they can add to both your enjoyment of the property and its overall value. Paying for these improvements out of pocket isnt always feasible though, so consider your needs when shopping around for the right home improvement loan. If getting a personal loan to fund a big home improvement project isnt right for you, consider these other financing options:
Are Home Improvement Loans Tax Deductible
The Tax Cuts and Jobs Act changed many of the deductions that were once available to taxpayers. Yet, according to the IRS, the interest paid on home equity loans, home equity lines of credit, and second mortgages may still be deducted from your taxes in many cases.
To deduct loan interest from your taxes, the funds you borrowed must have been used to build or substantially improve the home that secures the loan. All the loans described above are secured loans.
Therefore, if you use an unsecured loan to fund your home renovation, you might not be able to deduct the interest you pay. Confirm your situation with an accountant, tax attorney, or other tax advisor.
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