The best way to finance home improvements is to pay cash, but that’s not always an option. After all, home repairs and renovations aren’t cheap. The median amount homeowners spent on home improvements in 2022 was $22,000, according to a recent survey on home renovation trends by home design website Houzz. Even relatively contained projects can be costly: Bankrate says the average US homeowner spends about $8,600 on a new roof, and minor kitchen renovations can easily cost between $10,000 and $15,000. But with homeowners reluctant to give up the 3% mortgage rates they got during the pandemic housing boom, even pricier renovation projects seem mighty appealing to people who plan to stay put.
“Faced with shortages of housing stock and high interest rates, we’re seeing homeowners update their current homes to make the space more functional for the long term,” said Liza Hausman, vice president of industry marketing at Houzz. “We’re also seeing an uptick in additions, with the vast majority of homeowners hiring professionals to achieve their goals.”
The good news is that several financing options exist for home improvement projects, including home equity loans, HELOCs, and the aptly named home improvement loan — a personal loan used to finance property repairs and renovations. More than a quarter of homeowners relied on secured home loans (such as home equity loans or HELOCs) last year to pay for projects that cost more than $50,000, according to Houzz — an increase of 2% over the previous year. Don’t want to use your home as collateral? Enter the home improvement loan.
Here’s how home improvement loans work and tips for getting one to fund your next project.
A home improvement loan is an unsecured loan that you can use to pay for various home repairs and renovations — such as a roof replacement, furnace/HVAC repairs, kitchen or bathroom remodel, deck addition, solar panel installation or landscaping. Loan amounts range from $3,000 to $100,000, which you repay with interest in monthly installments over one to five years.
Unlike a home equity loan or HELOC, a home improvement loan is not secured by your house (lenders may not even consider any home-related details). Instead, loan approval is contingent on factors like your credit and income.
A home improvement loan can be a good option if you don’t have enough equity to qualify for a home equity loan or HELOC — or you just don’t want to put your home up as collateral (equity is your home’s value minus your mortgage balance). They can also be a smart choice if you need to access funding quickly: The loan approval process is typically much faster than for equity-related loan options.
TIP: Starting in 2023, you can claim tax credits for some energy-efficient updates, including doors, windows, insulation, heat pumps, and air conditioners. Details about the Energy Efficient Home Improvement Credit and Residential Clean Energy Credit are available on the IRS website.
The best home improvement loan rates are available to borrowers with excellent credit, but that doesn’t mean you can’t qualify with a less favorable score.
According to Bankrate, home improvement loan rates currently range from about 6.5% to 36% — but the rate you get depends on factors like your credit score, annual income and debt-to-income (DTI) ratio. To get the best home improvement loan rates, compare at least three lenders, paying attention to the loan size, fees and terms of each offer. Here’s a sample of today’s average loan rates based on credit score:
Keep in mind that rates aren’t the only consideration: The best home improvement loans offer competitive interest rates, low fees, and manageable monthly payments.
You can use a home improvement loan or equity financing (a home equity loan or HELOC) to fund home repairs and renovations. Here’s how these three options compare:
TIP: Some government programs can help pay for home repairs and renovations. For example, an FHA-insured Title I loan (available from FHA-approved lenders) is a fixed-rate loan used for any improvements that make your home “basically more livable and useful” — including buying appliances, making energy-efficient upgrades, and improving accessibility for people with disabilities. Loans under $7,500 are typically unsecured, but larger loans use your home as collateral.
To further help you decide, here’s a rundown of the pros and cons of home improvement loans, home equity loans and HELOCs:
If you decide a home improvement loan is right for you, here are the basic steps for a successful application:
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Decide how much you need: Calculate how much cash you need for your home repairs or renovations, factoring in fees the lender may deduct from your loan proceeds.
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Check your credit score: As with other financing options, the higher your credit score, the better your rate. If you have poor credit, consider a co-signer to get a more favorable rate.
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Get prequalified: You can check rates with multiple lenders without damaging your credit score.
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Compare your options: Compare at least three lenders (including banks, credit unions and online lenders) to get the best home improvement loan rates and terms.
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Complete the application process: Be ready to submit documents (eg, a driver’s license, W-2s and paycheck stubs) to confirm your identity and financial situation.
Lenders offer various loans for home improvements that can come in handy when cash is tight. You can use these loans for home repairs and improvements or virtually anything else — though it’s best to stick to things that improve your home or your financial situation.
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publication. Check the lender’s website for the most current information.
this article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].
