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Renovate now, pay later: Are home improvement loans a good idea?

Getting a home improvement loan to fund your dream renovation can be smart if you play your cards right.

SoFi reveals the average cost of a home renovation ranges between $20,000 and $80,000 [1]. If these numbers make your jaw drop, don’t panic just yet. Home improvement loans can help you finance your project without draining your savings.

Key insights

  • Home improvement loans are for homeowners wanting to finance property renovations and upgrades.
  • Consider a home improvement loan if you have a high-cost project, good credit, and a stable income.
  • Types of home renovation loans include personal loans, home equity loans, and cash-out financing, to name a few.
  • Home renovations are smart investments if they increase your home’s value, improve your quality of life, or address necessary repairs.

What is a home improvement loan?

A home improvement loan is a financing type that lets homeowners borrow money to renovate or upgrade their homes. It helps you pay for projects like remodeling a kitchen, adding a new room, or fixing damage after a natural disaster.

Home improvement loans come in various forms, including personal loans, home equity loans, and cash-out refinancing. The best loan type for you will depend on factors like your credit score, the amount of equity you have in your home, and the size of your renovation project.

Who home improvement loans are for

According to Justin Godur, CEO of investment, advisory, and fund placement firm, Capital Max, “Home improvement loans are perfect for homeowners who need to finance repairs or upgrades but don’t have the savings to cover the costs… or those looking to increase their home’s value before a sale or refinance.” They can be especially helpful if you have a high-cost project, such as a major kitchen remodel or an ADU addition.

home improvement loans quote by justin godur

How home renovation loans work

Getting a home renovation loan is relatively straightforward. You’ll apply with a lender, bank, or credit union, who will review your credit history, income, and other financial information to determine if you qualify.

If approved, you’ll get the funds from your loan in a lump sum. From there, you’ll use them to pay for your renovation project. Then, you’ll repay the loan over a set term — typically with fixed monthly payments.

The interest rate on your loan depends on factors like your financing type, credit score, and debt-to-income ratio. Rates always change, but at the time of writing, U.S. Bank shows you can expect an APR ranging from 8.74% to 24.99% for a personal loan, or an APR of 8.95% to 13.10% for a home equity line of credit.

Pros and cons of home renovation loans

Securing a home renovation loan can be an amazing way to finance your dream project, but they’re not for everyone.

Godur suggests weighing these pros and cons before getting one:

ProsCons
Can increase your property’s valueAdds to your financial liabilities (you risk losing your home if you use your home as collateral and default on payments)
Get immediate funds for urgent repairsInterest costs can be high
Possible tax deductions depending on interest paidRisk of spending more than the value added to your home

When should I get a home improvement loan?

A home improvement loan may be wise if you answer “yes” to most of these questions:

  • Is the renovation project necessary or urgent?
  • Will the renovation increase your home’s value or improve your quality of life?
  • Have you gotten quotes from multiple contractors to ensure you’re getting a fair price?
  • Can you comfortably afford the monthly loan payments on top of current expenses?
  • Have you shopped around for the best loan rates and terms?
  • Do you have a stable income and a good credit score to qualify for favorable loan conditions?
  • Have you considered alternative financing options, such as saving up for the project over time?

Home improvement loan requirements

Home improvement loan requirements vary by lender but often include:

  • A credit score of at least 680: Higher scores may qualify for better rates and terms.
  • Detailed project plans: Lenders may ask for contractor estimates and information about your renovation.
  • Equity in your home: For home equity loans or lines of credit, you’ll need sufficient equity.
  • Low debt-to-income (DTI) ratio: A DTI no higher than 45% shows lenders you can afford to take on new debt.
  • Proof of income: Lenders want to see you have a stable income to repay the loan.

How to get a home improvement loan: Step-by-step application process

Applying for a home improvement loan looks a little different for everyone depending on what lenders ask for and individual circumstances.

Step #1: Find out how much you need to borrow

Get quotes from contractors and factor in the cost of materials, labor, and any unexpected expenses. Having a clear idea of how much you need to borrow will help you choose the right loan option.

Step #2: Check your credit score

Your credit score plays a major role in determining your eligibility for a home improvement loan and the interest rates you’ll get. Check your credit report for any errors and take steps to improve it if necessary. A higher score will likely qualify you for better loan terms because lenders predict you’ll repay on time.

Step #3: Shop around and compare loan offers from multiple lenders

Compare APRs, terms, and fees from various lenders, banks, and credit unions. Look for loans with competitive interest rates, flexible repayment terms, and minimal fees.

Step #4: Gather required documents

Your lender may ask you to provide certain documents to verify your income, assets, and debts. These often include your driver’s license, pay stubs, W-2 forms, tax returns, bank statements, project estimates, and proof of home ownership.

Step #5: Submit your loan application and wait for approval

Many lenders offer online applications, making the process more convenient. After you submit your application, the lender will review everything and make a decision. Approval times vary, but some lenders may get back to you within a few business days.

Step #6: Once approved, review and sign your loan agreement

Make sure you understand the terms, interest rates, fees, and repayment schedule. Only sign the documents to accept the loan once you’re comfortable with the agreement.

Step #7: Receive your funds and start your renovation project

The lender will release the funds after you sign the loan agreement. Most likely, you’ll see the money in your bank account or receive a check in the mail. Once you have the funds, you can start renovating! Stick to your budget and timeline to ensure the project stays on track.

Step #8: Make on-time repayments to your lender

Automatic payments or reminders are your best friends here. Late repayments can result in fees, while on-time or early repayments help you improve your credit. Can’t make your payments? “Contact your lender immediately to discuss restructuring your loan or getting a temporary forbearance,” Godur advised. Being proactive can often prevent severe financial consequences.

How to get a home improvement loan infographic

What types of home renovation loans are available?

You have several loan options when financing your home renovation project. The right choice depends on your unique situation, such as your income and the equity you have in your home. If you don’t have much home equity, personal loans or credit cards may be more suitable options. But if you have substantial equity, a home equity loan or cash-out refinancing may offer lower interest rates.

Home improvement personal loans

Many choose personal loans for their home renovations because they’re unsecured — meaning they don’t require collateral. They often have fixed repayment terms and interest rates. Getting a personal loan may be a good idea if you don’t have equity in your home or need capital quickly.

ProsCons
Fixed interest rates and predictable monthly paymentsHigher interest rates compared to secured loans
No collateral requiredTighter loan limits than home equity loans
Quick and easy application and funding processShorter repayment terms — typically around five to seven years

Home equity loans

With a home equity loan, you can access funds by leveraging the property equity you’ve accumulated over time. These loans usually have fixed interest rates and monthly payments, making them a predictable and stable option.

ProsCons
Fixed interest rates and predictable monthly paymentsClosing costs and fees can add to the overall cost of the loan
Lower interest rates compared to unsecured loansRequires equity in your home
Potential tax deductions on interest paid (consult a tax advisor)Your home serves as collateral, putting it at risk if you default on payments

Cash-out refinancing

When you opt for cash-out refinancing, you essentially replace your current mortgage with a new one for a higher amount, pocketing the difference in cash. This option can be advantageous if current mortgage rates are lower than your existing rate. It’d allow you to secure a lower interest rate while getting funds for your renovation.

ProsCons
Get a large sum for your renovation projectClosing costs and fees can be substantial (typically 2% to 5% of your loan amount)
Possible tax deductions on interest paid (consult a tax advisor)Higher monthly mortgage payment and longer repayment term (the interest can add up!)
Usually lower interest rates than personal loans and credit cardsRisk of losing your property if you don’t repay your loan on time
close up of man entering credit card information on laptop

Source: rupixen

Credit cards

While not a traditional loan, you can pay for smaller home renovation projects with credit cards. This option may be convenient as long as you know you can pay off the balance quickly — otherwise, you could end up paying a high APR.

ProsCons
No collateral requiredEasy to accumulate debt if not used responsibly
Earn rewards or cashback on purchasesHigh interest rates if you don’t have a plan to pay it off quickly
Take advantage of 0% APR if you pay the balance in full before the offer expiresLimited to smaller renovation projects

Title I property improvement loans

Insured by the U.S. Department of Housing and Urban Development (HUD), Title I loans are designed for specific home improvement types, such as energy-related upgrades or accessibility modifications. These loans are excellent if your project aligns with the program’s requirements and you want a government-backed loan.

ProsCons
Designed for specific types of home upgradesLimited to specific improvement types
Government-insured, offering more lenient qualification requirementsRequires finding a lender participating in the Title I program
Fixed interest ratesTighter borrowing caps
home renovation in progress in the kitchen

Source: immo RENOVATION

Are home renovation loans a good idea?

A well-planned home upgrade can boost your quality of life and property’s value. When you need quick funding without depleting your savings, home improvement loans offer flexible repayment options to make your vision a reality.

But before signing on the dotted line, consider your financial situation and long-term goals. Will this stretch your budget too much? If so, it may be better to save up and renovate later. “Going into more debt than you can afford is always a bad idea,” said Omer Reiner, President of Florida Cash Home Buyers, a real estate investment company.

He further explained that home projects tend to cost more than you think they will. “Consider a home equity line of credit (HELOC),” he suggested. Unlike a home equity loan which allows you to borrow a large sum against your home’s current equity, “a HELOC loan allows you to borrow what you need, as you need it.” When you go this route, you’ll only pay interest on the actual amount borrowed — not on the entire credit line.

Frequently asked questions

Are home improvement loans hard to get?

Having a strong credit history and consistent employment improves your chances of approval. Lenders want to know you can repay the loan on time and with minimal risk.

What credit score do I need to get a home renovation loan?

In general, a credit score of 680 or higher is recommended to qualify for a home renovation loan with favorable terms. But some lenders may offer loans for borrowers with lower credit scores between 580 and 600. Loans with lower credit score requirements may come with higher interest rates.

How much money can I get from a home improvement personal loan?

Typically, you can get loans starting from $1,000 for smaller projects, like painting or minor repairs. For larger renovations, like a room addition, you may be able to borrow up to $100,000.

Sources:
1. SoFi, “How much does it cost to remodel or renovate a house?” December 8, 2023

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