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Home improvement is big business in the United States — to the tune of $457 billion. And that figure is expected to grow mightily in the next few years. Couple that with the hot housing market, and people will be looking to revamp their living spaces for the foreseeable future.
Perhaps you’re looking to replace your weather-worn back deck or want to redo your powder room to fix the chipped floor tiles and leaky sink. Whatever your home project is, if you’re looking to spend money on your property and don’t want to (or can’t) pay out of pocket, you may want to explore your finance options. Specifically, a home improvement loan.
What Is a Home Improvement Loan?
A home improvement loan is financing that is secured to pay for home-related expenses. Like repairs or an addition for your house. Many brick-and-mortar banks, credit unions and fintech companies offer these types of loans. And like other types of loans, this money carries an interest rate and payment terms that the borrower needs to adhere to when paying the money back.
There is no *one* home improvement loan; there are several types of loans that fall under the category of “home improvement.” (And sometimes this loan is simply referred to as a personal loan.) Qualifications vary by lender, but many have similar requirements — like having proof of employment and a government ID or birth certificate.
Why You Might Want a Home Improvement Loan
There are a number of reasons why you might want to finance a home improvement through a loan.
You require a large amount of funding. Sometimes a home reno project requires money you just don’t have (or can’t save for in a reasonable amount of time before you start a project).
It’s an emergency. If you’re on a tight timetable or an urgent need has popped up, home improvement loans might be the best option for your situation.
You want to pay a little bit over time. Perhaps you’d prefer to borrow funds and spread the payments out versus dropping a good chunk of change down all at once.
Whatever your reasons, remember that all personal loans require some consideration of the pros and cons before you push forward.
Secured Loans vs. Unsecured Loans
Let’s take a quick detour to discuss secured loans and unsecured loans. When it comes to personal loans, here’s what you need to know about them:
Secured loan: This type of loan requires collateral, like a home. Since the borrower is putting up an asset, a lender typically views lending this money as less risky. A mortgage is an example of a secured loan.
A secured personal loan is generally easier for a borrower to get.
Secured personal loans tend to have lower interest rates.
Unsecured loan: This type of loan doesn’t require collateral; rather, a person’s creditworthiness helps a lender determine whether or not they should lend someone money. A student loan is an example of an unsecured loan.
An unsecured personal loan might be more difficult for a borrower to qualify for.
Unsecured personal loans tend to have higher interest rates.
Depending on factors such as your credit score and how soon you need the money, you may choose one option over another.
6 Types of Home Improvement Loans
You have several options when it comes to home improvement loans. Here’s what you need to know about the different types of loan funding.
1. Credit Card
OK, this isn’t a loan, but it’s still an applicable payment option. If you’re in a pinch, you could put a home expense on an existing credit card. Ideally, this would be a card you can pay off at the end of the month without accruing interest (or better yet, one that will earn you points or other favorable benefits for using it).
Alternatively, if you have good credit, you could apply for a new credit card and likely get approved in a short period of time. Depending on your creditworthiness, look for a credit card with an introductory 0% APR for a set period of time (one year, 18 months, etc.) before the higher interest rate kicks in. That way you can pay the expense off over time if you need to, which is a money-saver in itself considering the average credit card APR hovers around 20%.
2. Personal Loan
A personal loan is an unsecured loan that can be used to pay for just about anything. If you need money quickly, this might be your best bet.
You can stick with your current bank or shop around for a personal loan that meets your needs. Depending on your credit score — good or excellent would benefit you the most — you could qualify for a loan with a low interest rate. Traditional banks, credit unions and financial institutions all offer personal loans with various conditions and rates.
3. Home Equity Line of Credit
A home equity line of credit, or HELOC, can be used to fund major expenditures, such as home improvement plans but also non-property expenses like education (technically any home improvement loan can be put toward other expenses). Unlike a personal loan, a HELOC is a secured loan, and the collateral is the borrower’s equity in their home.
With a home equity line of credit, there is a credit limit, a specified borrowing period and, typically, varying interest rates and payment terms. The money is usually dispersed within one to two weeks.
4. Home Equity Loan
A home equity loan comes with fixed payments and a fixed interest rate for the duration of the loan (or “term”). With home equity loans, also referred to as a second mortgage, you get the entire amount all at once — which could be a good or not-so-good thing, depending on what you have planned with the money.
Unlike a HELOC, interest rates and monthly payments are fixed. However, it’ll generally take you a while to see the money — anywhere from a week to a couple of months. A home equity loan could be a good option for you if you know you’ll spend the money wisely and pay it back on time.
5. Cash-Out Refinance
With a cash-out refinance, you use some of the equity in your home to get cash. In this refinancing option, you change the terms and amount of the loan, replacing your previous mortgage with a new one (so it’s not a second mortgage like with a home equity loan). You tap into some of the equity you’ve built up — the amount you can borrow is typically capped at around 80% of your home value — to get access to cash and a new fixed-rate mortgage. (Note: You’ll have to pay closing costs with this option.)
This type of refinancing can help you take advantage of lower interest rates or a more favorable loan term. If you have some leeway on when you need the money (you’ll need to get an appraisal and follow other steps with this refinancing option), this could be a choice for you.
6. FHA 203(k) Rehab Loan
An FHA 203(k) rehab loan allows buyers or homeowners to finance both the purchase or refinancing of a house (including its rehabilitation costs) through one mortgage. This type of loan offers fixed and adjustable rates and long repayment terms.
To be sure, there are hoops to jump through with an FHA 203(k) loan and it takes a more significant amount of time to get approved — applications must be submitted through an approved lender, there are listed eligible rehab activities, you may only be able to work with certain contractors and you can only use this loan for a primary (not rental) residence, to name a few regulations. However, for the most part, you only need to put at least 3.5% toward a downpayment and can get qualified with a fair credit score.
Ultimately, the best home improvement loans or funding will depend on your qualifications, needs and availability. (Per the latter, some institutions have halted greenlighting HELOC loans with the current market in flux.) Of course, you will also want to consider personal loan rates, any origination fees, repayment terms and other factors when choosing how to pay for any home improvement projects. (Which we’ll touch on later in the article.)
Our Picks for the Best Home Improvement Loans
Lender
Best For
APR
Apply Online
Wells Fargo
Borrowers Who Want Options
5.74% to 19.99%
Yes
Navy Federal Credit Union
Military Community
7.49 to 18.00%
No
Discover
Customer Support
4.15% to 8.99% (for first liens)
Yes
SoFi
Borrower-Friendly Terms
5.74% to 21.78%
Yes
Upstart
Borrowers With So-So Credit
5.22% – 35.99%
Yes
5 Best Home Improvement Loans in May 2022
Here are the top personal loan lenders for borrowers looking to secure home improvement loans.
Wells Fargo
Rates as low as 5.74% APR
Flexible financing options
Loan amounts from $3K to $100K
Wells Fargo is a familiar name in the banking world. With approximately 4,900 branches and more than 12,000 ATMs in over 30 states, Wells Fargo is a giant in the retail banking space. This bank offers 24/7 customer service support by phone, an easy-to-navigate website, and a highly rated mobile app for both Android and Apple.
Check out The Penny Hoarder’s overall review of Wells Fargo for 2022.
Navy Federal Credit Union
No application or origination fees
Terms up to 180 months
No collateral required
Navy Federal Credit Union was founded in 1933 at the tail-end of the Great Depression. This credit union serves U.S. military members in all branches, veterans, Department of Defense employees and their family members — to the tune of 10 million member-owners. Navy Federal has branches all around the world and offers many of the traditional banking products.
Discover
10-, 15-, 20- and 30-year terms
No origination or appraisal fees
Loan amounts from $35K to $300K
Discover is probably most known for being a credit card brand. But, the company also offers online banking accounts and products, and a variety of loans (on top of many credit cards, of course). Discover has a highly rated mobile app, over 60,000 fee-free ATMs and a quick interactive quiz on its website to help users find the best bank account for their needs.
SoFi
Same-day funding
No prepayment penalties
No collateral required
SoFi is one of the newer, savvier financial institutions on this list with an impressive scope of offerings and as of January 2022 is a chartered bank. SoFi offers the traditional banking products, plus lots of member benefits such as a referral program, member rewards and career coaching.
Check out The Penny Hoarder’s review of SoFi Checking and Savings for 2022.
Upstart
Credit score isn’t the major qualifier
No down payment and no prepayment penalty
Funds are available the next business day
If your credit score has been the main disqualifier for you getting a loan, Upstart might be the company for you. It’s not the lender; rather, Upstart-powered bank partners handle all unsecured personal loans. Upstart offers loans with three- or five-year terms and boasts a customer rating of 4.9/5 after over 30,000 Trustpilot reviews.
For each lender, it’s essential that you review the different loan options and terms for more information.
What You Need to Get a Home Improvement Loan
Exact requirements will vary by lender and loan type. In general, you’ll need some combination of the following:
A good or excellent credit score
Proof of income (w-2s or pay stubs for traditional employment, and likely years of records if you’re self-employed)
Government ID or birth certificate
A certain amount of equity in your property (a home equity line of credit, for example)
You must be a member of some banks (like with Wells Fargo) to secure a personal loan
Many lenders require a minimum credit score to qualify for a home improvement loan. For example, you typically need a minimum credit score of at least 620 to secure a home equity loan.
What to Consider When Looking at Home Improvement Loans
When you’re shopping around for lenders and home improvement loans, there are lots of items for you to consider. Here’s a shortlist of what items you want to review and consider when researching home improvement loans:
Total loan agreement (loan terms)
Loan amount and maximum loan amount
Monthly payments
Your credit history and credit score (and any upcoming purchases you may want to defer to keep your score intact)
Fixed interest rates
Adjustable interest rates
Secured personal loans (require collateral)
Unsecured personal loans (don’t require collateral)
Any prepayment penalties
Late fees
Typically, for personal loans, you can look up your eligibility, loan offerings and current rates on a company’s website. In some cases, you might find out you qualify for a loan in a short period of time.
Additional Ways to Finance Home Improvement Projects
If you’d prefer not to take out a loan but need access to funds, you have options there, too.
You might choose to put household expenses on a credit card, for example. That has its own pros and cons (like the other funding choices) that you’ll want to consider. For instance, you’ll likely be able to secure a credit card pretty quickly, but terms (like a high interest rate) will apply. Depending on certain factors — such as your likelihood of qualifying for a home improvement loan and how soon you need the money — you may decide to go this route.
And of course, cash is king, as they say. If you can afford to pay for your home improvement projects comfortably with liquid funds, that’s probably the best way to go.
Frequently Asked Questions (FAQs) About Home Improvement Loans
We’ve answered some of the most common questions about home improvement loans to help you make a decision about whether to apply for one and which financial institution you might select.
The best loan for you depends on many factors. If you have excellent credit and need money for a home renovation project sooner rather than later, a personal loan or low (or no) APR credit card may be the best option for you. If your project runs in the five-figure range and you have excellent credit or a good amount of equity in your property, then a home-equity or home equity line of credit loan might be best for you.
Like most situations in the personal finance space, your individual needs and eligibility will determine the best home improvement loans and course of action for you.
Many traditional banks, credit unions and financial institutions offer home renovation loans. Depending on your qualifications and individual needs, the right or *best* bank for you will vary.
If you prefer a traditional bank with brick-and-mortar locations, Wells Fargo might be your preferred choice. If you’re OK operating entirely online, a lender like SoFi will likely meet your needs.
Whether you own a condo, stand-alone house, mobile home or vacation property, you can apply for a home improvement loan.
A reminder that all loans might not cover all properties — for instance, FHA 203(k) loans are typically used for single-family properties, although other structures may be covered if they fall under certain restrictions — or the dollar figure you want, so make sure you search for the loan product that serves your needs.
Once again, file this under: It Depends. For instance, a personal loan or credit card may be best if you need access to quick and easy funds. If you need a large amount of money and feel comfortable getting it all at once while putting your house up as collateral, a home equity loan might be the way to go.
It’s a good idea to list out the total amount of money you want to fund your project. Compare different payment methods (loans, credit cards, home equity lines of credit, etc.) and see which terms and conditions meet your needs.
Contributor Kathleen Garvin (@itskgarvin) is a personal finance writer based in St. Petersburg, Florida, and former editor and marketer at The Penny Hoarder. She owns a content-writing business and her work has appeared in U.S. News, Clark.com and Well Kept Wallet.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.