Home Improvement Loan Options
Home improvement projects aren’t going to get themselves done, but the costs of these renovations can feel daunting to some homeowners. Not everybody has the money to pay for these endeavors upfront, which is why many homeowners choose to take out home improvement loans.
What Are Home Improvement (Renovation) Loans?
Just like with mortgages, auto loans and other types of loans, you can borrow the money you need for your home improvement project and pay back the full amount over time. Taking out a home improvement loan is similar to most loans, in that the process starts with finding the right lender for the type of loan you need and agreeing on a repayment plan that works for your situation.
Options For Home Improvement Or Remodel Loans
Whatever your reason for making improvements – making home repairs, remodeling or increasing the home’s value for resale – and depending on your financial situation, there are many different options for home improvement loans. See if any of these loan options would work for you:
A personal loan gives a homeowner a lump sum of money that they would then pay back over a series of monthly payments. While used often for home renovations, you can use a personal loan for many different purposes. Unlike some other home improvement loans, personal loans are unsecured and not backed by any collateral. If your home improvement projects are relatively small and you can pay off your debt in a shorter time frame, you might consider getting a personal loan.
For further questions about this type of loan, you may refer to our FAQ page.
If you have enough equity built up on your property and your interest rates are higher than the market’s, you can kill two birds with one stone with a cash-out refinance. With this method, you would refinance your existing mortgage and convert your home’s equity into cash you can put toward your home improvements. This way you won’t need to take on an additional loan.
If a cash-out refinance sounds like the way to go, you can get approved at our sister company, Rocket Mortgage®.
Home Equity Loan
By contrast, a home equity loan, or a second mortgage, would be a separate loan you’d take on. With a home equity loan, your lender will approve you for a lump sum equal to a portion of the equity you’ve built up on your property – your equity being the difference between your home’s worth and the amount you still owe on the mortgage.
For example, if your home’s value is equal to $300,000 and you owe $100,000 on your mortgage, you have $200,000 in home equity. With a home equity loan, you could then borrow a portion, but not all, of that equity to put toward home improvements.
As with your first mortgage, the loan amount will be paid back over a period of time with a fixed or adjustable interest rate. If you feel confident you could pay off this second mortgage and have the equity built up, a home equity loan might work for you. Be mindful that a default on the loan can risk foreclosure or other legal consequences.
Read the differences between home equity loans and personal loans for more help in making your decision.
Home Equity Line Of Credit (HELOC)
A home equity line of credit, or HELOC, also utilizes your home’s equity, but as collateral instead of cash. With a HELOC, your lender sets a borrowing limit – usually 80% of your home’s value – that you can borrow from again and again over a period of time, called the draw period. The repayment period will follow the end of the draw period. Some loan terms stipulate that the entire loan amount is due at the end of the draw period in a lump sum, or balloon payment.
A HELOC is a smart choice if you’re not sure how much you’ll need for all of your repairs or renovations, as the line of credit allows you to borrow multiple times up to your limit. If you do have a good idea of the amount you need, then consider one of the other loan options discussed here.
Rocket Loans does not currently offer home equity loans or HELOCs.
There is always the option to charge the costs of your home improvements to your credit card. This is riskier, as credit cards carry high interest rates that can cost you more in the long run unless you fully pay off the charges each month. We recommend using a credit card over a loan if you only need to borrow a small amount and want a flexible payment option. If you can’t pay off the balance over an extended period of time, it can be difficult, but not impossible, to get out of credit card debt.
How Can I Get The Best Home Improvement Loan Rates?
The rates for your home improvement loans will largely depend upon your credit score and history. Lenders will look over your credit report to determine how big of a risk you could be as a borrower. A higher score tells them you are reliable and trustworthy with your repayments, while a lower score indicates you could have difficulty paying back the loan. Building good credit is the key to getting the loan you want, and maintaining a high score will make it easier for you to borrow however much you may need in your future.
Are Home Improvement Loans Possible With Bad Credit?
Many of these home improvement loan options require a decent credit score – a personal loan typically requires a score of at least 600 to 700 – but having poor credit isn’t necessarily the end of the road. There are ways to improve or dispute errors in your credit report, and additionally there are various home improvement loan grants and programs available to those who may qualify.
Some of these government-backed programs include:
- HUD grants and loans: Visit the S. Department of Housing and Urban Development (HUD) website for more information on their home improvement programs.
- FHA rehab loans: If you have a credit score of at least 580, you may be eligible for an FHA 203(k) rehab mortgage. Visit the HUD website for more information.
- USDA programs: The U.S. Department of Agriculture offers remodel incentives for rural properties through their Section 504 repair program. Contact your local Rural Development office for more information.
There is a lot to consider when picking from your loan options. Every choice has its ups and downs, but the key factors to consider are:
- How much do you need to borrow?
- Could you make your monthly payments or pay the amount back in full?
- Do you require flexibility in your repayment method?
- What loan terms would most benefit your current financial situation?
If a personal loan sounds like the best option, you can apply now with Rocket Loans®. Otherwise, review all of your options and your situation, and decide the best way for you to make those home improvements you’ve been dreaming about.
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