Answer all of your questions about financing your remodel by reading this ultimate guide. Looking for an online home improvement loan? Click here to see your options.
Home improvement financing options: a quick overview
Getting a home improvement loan is a big deal.
Our goal: to help you make the right decision for your home and your bank account.
Here are the remodeling loan options we'll discuss:
Personal loans: Personal loans are great for time-sensitive projects because you can get one as soon as 24 hours after you apply. These loans don’t require any equity in your home, you won't pay any prepayment penalties, and you’ll pay the same amount every month. Personal loans for home improvement have higher rates than many options secured by your home equity, but lower rates than many credit cards.
FHA loans: Federal Housing Administration (FHA) 203(k) and Title I loans are secured by the government and provide low rates for homeowners who lack equity or want to remodel after a home purchase. But plan ahead: these home improvement loans have a lengthy application process.
Home equity loans: Home equity loans provide low rates and and tax deductible interest, but use your home equity as collateral. Home equity loans are likely your best bet for major projects above $40,000. These loans have long repayment periods of 15-30 years and also include prepayment fees.
Home equity lines of credit: Home equity lines of credit (HELOCs) give you the flexibility to withdraw as much funding as you need up to a predefined limit. HELOCs let you borrow the cash you need for your project over a ten-year period, then repay it over the next 15 years. They have low interest rates, but require your home equity as collateral.
Refinancing: By extending your mortgage, you can get cash for your home remodel. Refinancing relies heavily on your home value, so be wary of using this financing option if you expect your property value to decline.
Credit Cards: Credit cards can be a good option for financing your home improvement project if you can pay your balance back quickly or if your project is urgent and you don’t have other options. It’s important to compare options and be fully aware of the card’s terms and fees.
When should I get a home improvement loan?
Key takeaway: A decision to finance your home improvement project comes down to two factors: your project’s time-sensitivity and your current debt load. Home improvement loans are generally better if your project is time-sensitive; otherwise you should wait to save cash.
There’s no denying the appeal of financing your home improvement with “cold hard cash.” Using savings means no interest, no future fees, and no long applications.
That’s why 62% of remodelers use cash for their projects.
You shouldn’t rush into a project even if you have the cash. Samantha N. Dinh, a Certified Financial Planner™ at Paragon Financial Planning, Inc., offers helpful advice about financing a home improvement with cash:
“Before you use cash, you should have at least three to six months of emergency funds. For a two-income family, aim for three months of funds; otherwise, six months for a single-income family. Other things to consider before tapping into your savings are making sure you’re cash flow positive on your expenses each month – and don’t forgo the ability to save for your long-term goals.”
Of course, you can’t always use cash for your home remodel. Sometimes your project is too time-sensitive to wait to save–whether because of a repair, you plan to sell your home, or some other reason.
In these instances, you need to look for a home improvement loan.
6 questions to ask before looking for a home improvement loan
Key takeaway: Answer these 6 questions before exploring home improvement loans for a project.
You should answer some basic questions about your finances and project before deciding which remodeling loan to use. In this section, we’ll walk you through these questions and explain how they’d influence your decision.
Question 1: What is your current debt to income ratio?
Your debt to income ratio compares your overall debt (student loans, car payments, etc.) to your overall income. The ratio tells lenders your ability to manage monthly payments and ultimately pay back your loan.
The lower your debt to income ratio, the more home repair or improvement loans you may qualify for. For example, a debt to income ratio of 45% or less can qualify you for a home equity loan, whereas a ratio below 36% can qualify you for refinancing options.
Use Money Under 30’s debt to income calculator to find your ratio.
Question 2: How much home equity do you have?
Your home equity is your home’s value, minus any debt you owe on the house. Equity increases as you make mortgage payments and as your property goes up in value. By pledging your equity as collateral to a lender, you can free up cash and get access to options with lower rates.
If you don’t have enough home equity for a secured option, you can still qualify for unsecured options such as personal loans.
Question 3: What is your estimated credit score?
Your credit score is calculated based on a number of factors like payment history, current debt, and credit use. Lenders use your credit score to determine your ability to pay back a loan. A good rule of thumb for credit scores, which range from 350-850, is _the higher your credit score, the better interest rates you receive on a home improvement loan.
Question 4: Are you in a steady job, and do you plan to change jobs soon?
Having a steady income throughout your home improvement lets you feel confident about paying back your renovation loan without sacrificing long-term goals such as retirement. Without steady income, it may be harder for you to meet monthly payments.
“If you’re in a situation where you recently received a significant raise or income increase - that might be the situation where you’re confident you will have plenty of money to pay back [a loan] and save,” Catherine Hawley, the owner of an independent financial planning practice, says.
Question 5: What is your project’s estimated budget?
36% of homeowners say staying on budget is their largest renovation challenge - but, according to our experts, it’s one of the most important parts to your home improvement.
“The first place I start is by asking for an estimate of how much the project will cost,” Hawley says. “I encourage my clients to talk to a few different contractors to get as accurate an estimate as possible. If you start without an estimate, you could easily end up overspending. That could mean cutting back on other things that are important to you.”
While making your renovation budget, you should get estimates from multiple professionals so you can craft a budget based on information unique to your home. Sites such as BuildZoom can find you trusted professionals for your project.
Once you know how much money you need, you’ll be in a better position to find the right home improvement loan.
Question 6: How urgent is your project
The time from beginning your application to receiving money varies by loan option.
If you need to urgently remodel, certain options like a personal loan can transfer funds days after you apply. If you’re not on a tight timeline, other home improvement loans like a FHA loan, which take longer to deposit funds into your bank account, may be a good fit because of their lower rates.
Bottom line:_ Answering these 6 questions can help you find the right home improvement loan for your project!
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Personal loans for home improvement
Key takeaway: Personal loans let you borrow up to $35,000 for your home remodel without using any home equity. Because personal loans don’t have a complex application process, you can get one as soon as a day after you apply–making them great for urgent projects. You’ll also pay the same amount every month because personal loans have fixed rates, but these rates are often higher than those on financing that requires home equity.
Home improvement loans with no equity, explained
For personal loans, remember one phrase: fixed-rate funding on the fly.
Here’s what that means for you:
Personal loans are among the quickest home improvement financing options, so you can remodel right away. After getting prequalified for a rate, you’ll just have to provide income verification, typically a W-2, to lock in your rate. Then you can get funded quickly.
Your credit score and income largely determine the rate you’ll get because your score tells lenders how likely you are to pay back your loan. The higher your credit score, the lower the rate you’ll get. Personal loans tend to be best for credit scores above 640, but if your credit score is at least 580, you may be able to qualify.
Personal loans typically have fixed interest rates, which are locked in for the length of your loan. Terms tend to last 3-7 years – a far cry from the 20-30 year terms on secured options.
The average personal loan interest rate of 10-20% is a higher home improvement loan rate than you’ll find on secured options, but lower than on many credit cards.
Other upsides include predictable monthly payments and no home equity requirements.
Personal loans are one of the few home improvement loan options that preserve your equity for emergencies or, if you’re a new homeowner, let you renovate without having home equity.
But personal loans also have drawbacks.
Personal loans don’t offer tax advantages, are subject to 1-5% origination fees, and have higher interest rates than secured home renovation loans.
“If someone already has a lot of debt or job uncertainty, I would want them to have other pieces of the financial puzzle in place before applying for a personal loan,” Catherine Hawley, the owner of an independent financial planning practice, says. “I’d want them to feel they understand if the monthly payments were in their budget.”
Are personal loans for home improvement the right fit for me?
“If you lack the money to fix-up your home and have a time constraint – but are in a situation where you’re confident you will have plenty of money to pay back and save – a personal loan could be the right choice,” Hawley says.
FHA Loans: 203k and Title I
Key takeaway: Federal Housing Administration (FHA) home improvement loans have low rates for homeowners who lack equity or want to remodel right after purchasing a home. These rehab loans, however, are known for paperwork and regulations.
Understanding FHA loans
FHA loans are secured by the government, allowing lenders to offer lenient qualification requirements. You’re also likely to snag a low interest rate (around 2-5%) with these loans. Keep in mind FHA loans have a minimum of $5,000.
With two (seemingly similar) types of FHA loans, which is right for you?
Let’s start with the FHA 203k loan.
A 203k home renovation loan lets you borrow money for a home purchase and home remodel above $25,000. The 203K loan combines your renovation with your home mortgage, so you get the 203K loan as you purchase a home. If you can navigate paperwork and project restrictions, the FHA 203k loan can be great for that fixer-upper you’ve had your eye on.
You can either lock in your interest rate when you borrow the loan (fixed rate) or let your interest rise and fall over time as the market changes (variable rate). Variable rates, while they may start low, could rise over time. Currently, interest rates are expected to rise, so it may be riskier to take out an variable rate loan.
Projects funded by FHA loans must begin within a month of receiving funds and finish before 6 months. A 203k also requires a 3.5% down payment on a home. A 203K loan takes 1-3 months for approval.
You have two options for a FHA 203k loan:
Standard: The standard 203k allows you to get up to 110% of your home’s value after renovation. This higher threshold makes a standard loan great for extensive repairs.
Limited(Formerly streamline:) With a $35,000 maximum and slightly easier application process, streamlined 203K loans are best for smaller projects.
“FHA loans can be good options, but it may be more difficult to buy a house with them,” Katy Song, founder of Katy Song Financial Planner, says. “When you’re competing with other offers on a home, sellers will prefer to go with someone putting down 50% cash, rather than the 3-10% you can put down from a FHA loan.”
Now let’s turn to the FHA Title I loan.
Title I loans are fixed-rate, offer 12-20 year payment terms, and have no prepayment penalties. These home improvement loans give a maximum of $25,000, but require your home equity as collateral for $7,500 or above.
All FHA loans are subject to some of the same rules:
Loan amounts are based on the projected value of your home after renovations.
They require an upfront mortgage insurance premium (MIP) of around 1.75%.
An annual mortgage insurance premium (MIP) may also be paid monthly on your loan.
Your project plans and contractor must be lender-approved. If you’re an avid DIY-er, steer clear of this payment option.
Restrictions on FHA 203k and Title I loans
With so many options, what’s not to love? Well, you have to play by the government’s rules.
FHA loans can’t be used for luxury additions (think swimming pool or landscaping).
They’re also notorious for paperwork. The underwriter assigned to approve your application can take anywhere from 2 to 6 weeks - and that’s if your documents are free of errors.
How to get a FHA loan
An FHA loan may be the right choice if you don’t have much home equity or need a loan for both home buying and home remodel.
You can receive a FHA loan with a credit score of 500 or higher.
If you’re ready, head to an approved lender or mortgage broker to start the process. Approval takes anywhere from 1-3 months.
Home equity loans & home equity lines of credit (HELOCs)
Key takeaway: Home equity loans and lines of credit provide low rates for projects with large budgets and timelines. Both loans require you to use your home equity and have repayment terms of 15-30 years.
What’s the difference between HELOCs and home equity loans?
Home equity loans and home equity line of credit sound similar. After all, both use your home as collateral and are obtained at your local bank. Rates on loans that require home equity are also lower than credit cards and personal loans.
Here’s the main difference: home equity loans give you a fixed sum of money whereas home equity lines of credit let you withdraw as needed up to a predefined limit. Let’s explore both options.
Learning about the home equity loan
Home equity loans are fixed-rate with 20-30 year terms. That means a fixed monthly payment and no surprises. The amount you can borrow is based on a variety of factors like:
Your home’s loan-to-value ratio, which is your outstanding mortgage obligation compared to your home value (80% or less to qualify)
Your debt to income ratio (45% or less to qualify)
Your credit history – but since you’re pledging your home equity as collateral, this matters less. Using your home equity makes it easier to apply if you have bad credit.
Home equity rates (averaging 5%) are higher than refinancing options. They also require a home appraisal, which average $300-400. The loan approval process takes about one month.
Put simply, home equity loans are great for big budget projects – if you have equity in your home and feel comfortable paying off your debt over their long repayment terms.
Leaning on a home equity line of credit (HELOC)
Home equity lines of credit (HELOC) are usually variable-rate. They’re flexible, letting you take as much as you need, when you need - depending on the maximum set by your bank. The maximum in your line of credit is determined by your home’s value, your loan-to-value ratio, and your amount of outstanding mortgage.
“[For a home equity line of credit], interest rates go all over the place, and they’re charging you interest that goes up with the treasury. Plus, some home equity lines of credit require you to pay an extra annual fee,” Autumn Kruse, founder of Kruse Financial Strategy, says. “With home equity loans, there’s a structured payment schedule to keep you from letting your debt sit and collect interest.”
HELOCs are characterized by a draw period and a repayment period. During the 10-year draw period, you can spend money from your credit line. Monthly payments are required during both periods, but are typically smaller during the draw period. During the 15-year repayment period, monthly payments may leap to cover interest payments of 3-7% and the principal.
So, when are HELOCs the right fit?
HELOCs are great options for large projects, especially if you want flexibility. They’re also ideal if you have already built equity in your home.
Home Equity Line of Credit: Facts to Know: MyFico Blog
Refinancing your mortgage
Key takeaway: Refinancing means extending your current mortgage’s term and interest to free up cash for your project.
Quick cash and fixed rate financing - best of both worlds?
Here’s how refinancing works: the term and interest of your current mortgage are extended, but you can take out cash when you close the new mortgage. Refinancing rates are typically 3-4% for 15-30 year terms. But refinancing might mean you move further away from paying off your mortgage.
Even though you extend your term and rate, refinancing could lower your current interest and monthly payment, reduce your mortgage rate (and subsequent cost of the rehab loan), and provide cash for your project. The application process takes 30-45 days.
But refinancing comes with many fees. These includes application costs, an appraisal, origination fees, and document processing fees – all of which range $200-800 apiece. And don’t forget average closing costs of $2,000.
Risks to home improvement refinancing
Refinancing depends heavily on your home value: _you could owe more than your home is worth if your property value declines. In 2010, nearly 11 million homeowners were upside down on their mortgage.
Ready to refinance?
To know if you qualify, there are three principles to follow. Make sure your debt to income ratio is 36% or less, your loan-to-value ratio (your outstanding mortgage compared to home value) is 75% or less, and your credit score is 640 or greater.
But if you qualify, does refinancing make sense?
Refinancing can be great if:
Your home improvement project adds value to your home, so you can recoup costs.
You plan to stay in your home 5+ years after renovation.
You have substantial equity in your home.
Never refinance for a higher interest rate; ensure the cash you take out at closing is enough to cover your home improvement project.
Should You Refinance Now?: Dave Ramsey
Credit cards for home improvement
Key takeaway: Swiping is convenient, but has its risks. Avoid a card’s hidden fees and record high interest rates – unless you can pay off your bill right away.
Credit cards are easy, convenient, and work - or do they?
You may be able to finance your project without paying interest if you can get a 0% APR card. These cards have introductory periods with no interest, followed by a massive, double-digit increase. Be sure you can pay off your card before this period expires.
Credit cards also carry an average of 6 fees, such as late or transaction expenses, which can add up quickly.
Contractors may also incur credit card fees and pass high charges onto you, which often outweigh the benefits from rewards points.
“I encourage homeowners to look elsewhere besides credit cards because they’ll just overpay,” Catherine Hawley, the owner of an independent financial planning practice, says. “If they’re relying on a credit card for a remodel, they may not be taking care of other financial needs that are really important.”
So, is it ever right to swipe?
Yes – but rarely! Projects on a shorter timeline or of lower cost that can be paid off quickly are ideal for credit cards. Cards also great for racking up rewards points, and they’re easy to use. But beware of overpaying, ruining your credit score, or risking heavy debt from rising interest rates if you can’t pay right away.
Conclusion: Pick the best home improvement loan you can
You have big ideas for your dream home.
Whether it’s adding a deck for family barbeques or installing new wooden floors after repairing the foundation - your plans are more than pictures on your Pinterest board.
They’re an investment in your home and in your family.
“Your home is the only asset on your balance sheet you get utility from,” Katy Song, founder of Katy Song Financial Planner, says. “So, while I want my clients to invest in their retirement, you can’t use that until you’re 60 years old. For example, if a functioning kitchen would greatly improve your quality of life for the next decade, you should also invest in that.”
By arming yourself with the right financial tools, such as this guide, you can make financial decisions worthy of the home you deserve. And you’ll be confident in the health of your bank account and your home.
Compare your home improvement loan options by clicking here.
Annual percentage rate (APR): The annual interest rate charged for borrowing a loan, plus fees, divided by the term of the loan.
Debt to income ratio: Monthly debt owed divided by monthly gross income. Debt to income ratio measures how well you can repay your debt and manage monthly payments. A lower debt to income ratio means you may qualify for more financing options.
Equity: The difference between the amount you owe on your home and what your home is worth. You can earn more home equity if you make more payments on your home or if your property value increases. Having more equity may qualify you for more financial options.
Fixed rate loans: A loan whose yearly interest rate doesn’t change over the life of the loan.
Loan-to-value ratio: Expressed as the ratio of your mortgage to the appraised value of your property. Loan-to-value ratio tells lenders how risky it is to lend to you. A lower loan-to-value ratio may qualify you for more financial options.
Mortgage insurance premium (MIP): MIP is required for FHA loans as a way of protecting lenders from borrowers who default. Borrowers are charged this fee upfront, but some homeowners may also be subject to annual MIP premiums. The length of your MIP depends on the term of your loan and the amount of your initial down payment.
Principal payment: The principal of a loan is the amount borrowed. For loans, monthly principal payments are typically charged after the interest rate. If you pay down your principal, you are paying off more of the loan.
Secured loans: Secured loans require homeowners to put up their house as collateral. If a borrower defaults, then the lender may seize their home as payment for the loan. Secured loans include home equity loans, home equity lines of credit, FHA loans, and refinancing options.
Unsecured loans: Unsecured loans do not require homeowners to put up their house as collateral. If a borrower defaults, then the lender has nothing to seize. Unsecured loans include personal loans.
Variable rate loans: A loan whose interest rate changes over time given the market. The interest rate for one year on your loan may go up or down the next year, which makes monthly payments less predictable.
Hearth’s content is offered without warranty and does not account for your personal financial situation. This content is solely informational and should not be considered tax, legal, or accounting advice. Hearth recommends that you seek the advice of your own tax, financial or legal advisers who are fully aware of your individual circumstances before engaging in any transaction.
The average rates described in this guide are based on a national average of rates available. Before borrowing, you should confirm any information with the product or service provider and read the information they provide, as well as any applicable terms and conditions. Only individuals with excellent credit will qualify for the lowest rates.