Home improvement loans continue to be one of the most popular financing programs for homeowners looking to fund house repairs, renovation and home remodeling. Many Americans want to remodel their homes but lack the cash in the bank to pay for the projects so loans for home improvements have become popular solutions.
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So what to do? Well, the credit markets are loosening up quite a bit in the last few years, so you may have more options to finance your renovation than you think. Many homeowners do not realize there are many options available to mee your needs so you can secure the best home improvement financing whether you are remodeling, landscaping or doing full-blown construction.
Most Home improvement loans are considered second mortgage loans, as they are a 2nd lien behind the 1st lien on title to your property.
Learn more so you can consider home improvement loans with unsecured loans, HELOCs, home equity loans, cash-out refinance mortgages and government initiatives from FHA.
Many lenders offer home improvement loans for people with good and fair credit scores.
Let’s examine if taking out a 2nd mortgage for a home remodel would be a prudent financial choice.
The RefiGuide will match you with top lenders so you can compare the best home improvement loan rates online and there are no fees charged up front to shop loans for home repairs, renovation or construction.
You can research and compare cash out refinancing, home equity lines, 2nd mortgages and unsecured personal loan programs that meet your needs to finance home improvements cost-effectively.
Examine the lender’s customer support resources and peruse feedback from past and present borrowers to ensure it aligns with your financial needs and home improvement goals.
Certain 2nd mortgage lenders provide affordable home improvement loan rates with no closing costs of lending fees, enabling borrowers to reduce expenses such as points, origination fees, late payment fees, prepayment penalties, processing fees, underwriting fees and more.
What is a Home Improvement Loan?
Owning a home often comes with a list of projects and improvements you’d like to undertake to make your space more comfortable, functional, or attractive. This is where a home improvement loan can be a valuable resource. Let’s dive into what home improvement financing is and how it can help you transform your living space and property’s value.
A loan for home improvements is specifically structured to assist with covering significant home-related costs or any projects with the goal of at enhancing your living space. With this financial tool, you have the means to finance a broad spectrum of endeavors, whether it’s a comprehensive home renovation or the refurbishment of a specific room.
Additionally, the money acquired through such home improvement loans can be used to address essential needs that elevate your daily life quality, such as fixing a leaking roof, installing a swimming pool, upgrading an antiquated HVAC system, or resolving plumbing problems.
How to Compare the Best Home Improvement Loan Offers Today
When shopping for the best home improvement loans online, it’s vital to explore your options and pre-qualify so you secure the financing that best meets your goals.
Annual Percentage Rate (APR): APRs encompass the complete cost of the loan, encompassing any lending fees that the bank or finance source might impose. If you are a credit union member, it’s a good starting point. Federal credit unions, in most cases only impose a maximum APR of 18%.
Monthly Payment: Even if you secure a low-interest rate, it’s crucial to ensure that the monthly payments align with your budget. Utilize a home improvement loan calculator to ascertain the ideal loan amount, rate, and repayment term that will yield a manageable monthly payment.
Loan Amount: Some home improvement lenders set a loan amount limit, (ranging from $20,000 to $100,000). If you anticipate your project will exceed these limits, search for a lender that accommodates larger loan amounts. Most personal loan lenders offer loan amounts that range from $10,000 to $50,000.
Whereas, most mortgage lenders offer home equity loan amounts ranging from $20,000 to $500,000 if you have enough equity and a low debt to income ratio.
Loan Term: A loan with an extended repayment term may yield lower monthly payments, but it’s worth noting that you’ll ultimately pay more in interest over the loan’s lifespan compared to a loan with a shorter repayment term.
Co-signer or Co-borrower: Certain lenders allow the addition of a co-signer or co-borrower to your loan application. In some cases, adding a borrower with a stellar credit score or higher income can help reduced the interest rate or even approve higher loan amount.
Defining a Loan for Home Improvement:
A home improvement loan is a financial tool designed to provide funds specifically for renovating, repairing, or enhancing your home. It serves as a dedicated financing product to assist homeowners in paying for a wide variety of projects, from kitchen remodels and bathroom upgrades to roof repairs and room additions.
These loans for home improvements are distinct from other types of financing, such as home equity loans, cash out refinance mortgages or unsecured personal loans, as they are tailored for home-improvement expenditures. Once you understand the basic fundamentals of the financing options you can make a practical decision and compare home improvement loan rates and lenders.
Take a moment to evaluate the amount of funding required. Today’s loans for home improvement come with different borrowing limits. Prior to submitting your home improvement loan application, assess the budget for your project to determine the exact cost. With this figure in mind, compare available loan alternatives to ensure they can supply the necessary funds.
Below are the 5 Best Home Improvement Loan Programs for Your Latest Remodel or Rehabilitation:
#1 Home Equity Loan
Other than cash in your savings account, the best way to fund home renovations is by using the equity in the property. When you bought your home, you put a certain amount down at closing, commonly 5% or 10%, or even 20%. Also, your home has likely gone up in value since you bought it. You can tap the built up equity to pay for your home repairs.
For example, if your house is worth $450,000 and you need to still pay $150,000, you have equity of $300,000. Most home improvement lenders will calculate 80% of the value of the house, minus what you owe to determine what you may borrow. In this case, you would be able to borrow as much as $210,000.
If you have a high level of equity, considering a 2nd mortgage or home equity loan may be a very effective way to make expensive home improvements that will add to your home’s value. If you have hundreds of thousands of dollars available, you could get a lump sum amount that is enough to complete a major remodel.
Generally, the benefit of using your home’s equity is that you will get a lower interest rate than you would on virtually any other type of home improvement loan. Your loan is backed by the home. If you do not pay, you will lose the home. The lender knows that people will pay their secured loan to keep their home, so they are willing to lower the rate you are charged.
With an equity loan, you may find advertised interest rates at competitive rates in 2024. The home improvement interest rate is fixed as well, so you know exactly what you will be paying for years in the future. Most borrowers appreciate fixed monthly payments so they can budget accordingly.
The best home improvement loans are available if you have high equity and you need one, big loan for a home project. It also is right for you if you feel more secure with a fixed rate, even if it is higher than other options. In some cases borrowers may opt to get a cash out refinance loan versus a home equity financing especially if their first mortgage rate is above the current market level.
If you are searching for a loan for home improvement with no equity you may need high credit scores. If you are seeking a home improvement loan with bad credit, you will likely need 20 to 30% equity in your property of find a FHA finance company that offers 203K loans. Bad credit home equity loans are not available with most mortgage lenders and banks, but there are still a few companies that do,
With the housing market slowing down going into 2025, you can bet that there will be more low-credit home improvement loan programs being released. For the most part, home equity loans for poor credit are readily available for people that have stable income and equity in their house.
The credit score requirements vary depending upon how much equity the borrow has left after taking out the secured loan. The demand for poor credit home improvement loans has soared since the inflation crisis. Check today’s home equity loan requirements.
#2 Home Equity Credit Line AKA- HELOC
A Home equity line is similar to home equity loans, in that you are borrowing equity in your home to pay for renovations. There are some key differences, however.
An equity line of credit is very similar to a credit line on a credit card, but is backed by your home. You can write a check with a HELOC and tap the funds on your line of credit as often as you like, as long as you stay under the approved amount.
HELOCs are a good choice if you are doing a long term home rehab and you are not totally sure how much you need and when.
In some instances, an equity line of credit has lower fees than home equity loans, and you do not need to take out all the money at once and start paying interest on the full amount.
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Both home equity lines and equity loans also have interest that is usually tax deductible for most borrowers. Learn more about home equity tax deductibility.
The biggest downside to a home improvement line of credit is the variable interest rate. That means the monthly payments are not fixed like equity loans and monthly payments will rise if the interest rate increases.
So, the HELOC rate can go up, at least after a short, locked period. The rate can only go up so much (check your loan paperwork), but the maximum rate is quite high, in the worst case situation. So, if the worst happens and you do not plan well, you can end up with serious financial problems that can cost you your home. Learn more on the pros and cons of HELOC vs. home equity loan.
Some equity lines of credit feature an interest only payment period when you are drawing out the funds. After that, the draw period ends and you begin to pay back interest and principal. This will definitely cause the payment to rise, and you also could have it rise due to a rise in rates.
Both an equity line and fixed rate home equity financing are good choices to finance your home remodel. Which you choose depends upon your personality and your project needs.
Either way, you will be getting a loan that at least in theory will add to the value of your home, if you spend the money wisely. It makes sense to review rates and offers from home equity lenders that are licensed to service your area. Shop for the Best HELOC Rates today.
#3 Personal Home Improvement Loan
Your other major option if you have no equity is an unsecured loan for home improvements. When you embark on the journey of exploring and investigating home improvement loan possibilities, you’ll discover that unsecured personal loans stand as a preferred selection for countless homeowners in recent years.
The reason behind this preference is the versatility of personal loans, which can be employed to finance virtually any home improvement project that you have been dreaming about.
Most of these personal loans offer a fixed rate that you pay off from three to five years. Most personal home improvement loans are secured by your home or other assets, via private money. However, these personal loan programs don’t require collateral, making them accessible for various projects.
The personal loans are based on your creditworthiness and can be obtained from banks, credit unions, or online lenders.
When you take out the personal loan, you will pay an origination fee of up to 5% of the loan amount, but you don’t have closing costs normally. The major downside of these loans for home improvements is that the approval amounts are rarely more than $20,000 or $30,000.
In most cases, this is not enough if you have a major project in mind. It’s always prudent to compare personal loans to HELOCs before you start your home improvement projects. Borrowers also appreciate that personal loan options can fund as quick as 24 hours.
#4 Cash Out Refinancing
In years past, the cash out refinance would be the first choice for homeowners to finance home improvements and remodels, however, interest rate are the highest they have been in two decades, Thus most homeowners already have a mortgage rate significantly lower than they would be able to get wit todays refinance rates.
Cash out refinancing does help you access your home’s equity to support a range of home improvement projects or aspirations.
Through a cash-out refinance loan, you have the the ability to receive money in exchange for assuming a larger mortgage that supersedes the initial one. With that being said, unless you have an interest rate above 6.5% , we suggest one of these other home equity loan programs to finance your home improvements so you can keep your existing low-rate mortgage.
#5 FHA 203K Loan
If you are getting a FHA loan and your home needs work, we strongly advise getting a 203k loan. You can combine your home loan with a construction loan into one, simple, low interest loan. This FHA home improvement loan is very popular for home renovation and new construction, such as adding an ADU or granny flat.
This government-backed program combines the purchase of a home and renovation costs into a single mortgage. This type of loan for home improvements particularly useful for those looking to buy fixer-uppers.
Many homeowners are taking advantage of solar energy that help the environment and reduce energy costs as well, Ask your lender if they offer Energy-efficient mortgages. These green energy loans enable you to fund environmentally friendly home upgrades through a mortgage insured by the FHA.
You can get a streamlined 203k loan for amounts that are no more than $35,000. Or, you can opt for a standard 203k loan that is for larger projects. Both loan types offer you very low rates that allow you to pay back the loan over the life of the entire mortgage loan.
Also consider Title 1 loans that were created to help borrowers with low to modest incomes who have resided in their homes for a minimum of 90 days. These home improvement loans are provided by private lenders, with backing from the U.S. Department of Housing and Urban Development (HUD).
Benefits of Home Improvement Loans:
Dedicated Funds: Home improvement loans provide a clear and separate source of funds for your projects, allowing you to maintain better control over your budget.
Enhanced Property Value: By investing in your house’s upkeep and aesthetics, you can potentially raise the value, leading to a higher resale price in the future.
Flexible Financing: With various types of loans available, you can choose the best home improvement loan rates that best align with your financial situation and the scope of your project.
Potential Tax Benefits: In some cases, the interest on home improvement loans may be tax-deductible, providing potential financial advantages.
Steps to Get the Best Home Improvement Financing
If you need to have home improvements done and don’t have all of the cash, you should strongly consider using one of the above four options. You will be able to complete your home renovation with the best home improvement loan so that you can enjoy home more, and hopefully add to your home’s value, too.
Home improvement loans are a customized financing solution that empowers homeowners to transform their living spaces, whether for essential repairs or to enhance their home’s aesthetics and functionality. By selecting the best home improvement loan and managing the funds wisely, you can turn your homeownership dreams into a reality.
About RefiGuide.org
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has worked as a mortgage loan officer in the industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, Linkedin and ActiveRain.
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