Image of man and woman taking a coffee break during home improvement project.

Home Improvement Loan Options

6-Minute ReadAugust 02, 2022


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 Is A Home Improvement Loan?

A home improvement loan is typically an unsecured personal loan or another type of loan that a homeowner can use to repair, improve or remodel their home.

How Do Home Improvement Loans Work?

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.

The Best Ways To Finance Home Improvements

Whatever your reason for making improvements – whether it be home repairs, remodeling or increasing the home’s value for resale – and depending on your financial situation, you have many different options for home improvement loans. See if any of these loan options would work for you.

Personal Loan

A personal loan gives you, as a homeowner, a lump sum of money that you will then pay back over a series of monthly payments. Although personal loans are used often for home renovations, you can use a personal loan for many different purposes. Unlike some other home improvement loans, personal loans are usually 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.

Interest rates for personal loans are typically fixed and are determined by the lender reviewing your credit report. Like with other loans, a higher credit score will likely mean a lower interest rate.

Cash-Out Refinance

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 through a cash-out refinance. With this method, you 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.

Home Equity Loan

By contrast, a home equity loan, or a second mortgage, is a separate loan you 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 can borrow a portion, but not all, of that equity to put toward home improvements.

As with your first mortgage, you’ll pay the loan amount back over a period of time with a fixed or adjustable interest rate. If you feel confident you can 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.

Rocket LoansSM doesn't currently offer home equity loans, but our trusted sister company Rocket Mortgage® does!

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 known as 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 LoansSM doesn’t currently offer HELOCs.

Government Loans

Depending on the type of improvement that you’re looking to make to your home, you may qualify for a government loan. A Title 1 loan can be used for items that boost your home’s livability. These might include accessibility upgrades, new appliances or energy-efficiency improvements.

With government loans, you may be eligible to borrow up to $25,000 for a single-family home. You won’t need to have any equity in your home to qualify for these loans, but you’ll have to live on the property for at least 90 days to qualify. Also, any Title 1 loan over $7,500 requires you to use your home as collateral or have a deed of trust on the property.

Credit Card

There’s always the option to charge the costs of your home improvements to your credit card. This is riskier because 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.

Save To Pay In Cash

One option for financing home improvement projects is to save your money and pay for the renovations with cash. Through careful budgeting and a little patience, you can pay for the renovations outright. This can help you avoid interest fees and other charges that may come with using a loan.

Home Improvement Loans For Poor 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. You have ways to improve or dispute errors in your credit report, and, additionally, various home improvement loan grants and programs are available as long as you 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 its 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 its Section 504 repair program. Contact your local Rural Development office for more information.

Financing Home Improvements: FAQs

What types of home improvement loans are best?

Choosing the best financing option for your home improvements will depend largely on your personal financial situation. If you have equity in your home, choosing a home equity loan or HELOC may prove to be the best option for your needs. However, if you don’t have much or any equity, a better option might be a home improvement personal loan.

Is a home improvement loan tax deductible?

Typically, home improvement loans aren’t tax deductible. However, if you’re making significant renovations to your home using a home equity loan or refinance, some costs may be deductible. Keep in mind that only significant renovations are likely to be eligible and you should consult your tax professional regarding your specific situation.

How can I get the best home improvement loan rates?

The rates for your home improvement loan will largely depend on 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 the lender 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.

Final Thoughts

There’s a lot to consider when choosing from your loan options. Every choice has its pros and cons, but the key factors to consider are:

  • How much do you need to borrow?
  • Can 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?

It’s important to review all your loan options and your financial situation before deciding on the best way to make those home improvements you’ve been dreaming about.

If a personal loan sounds like the best option for you, apply now with Rocket Loans.

Apply For A Personal Loan.

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