Most Popular Ways to Finance Home Improvements
Saving for making improvements to your home is often the least expensive route, but it’s not always possible. Thankfully, you have other options for financing! Our business is in home loans, so you might already guess, that’s the option we recommend, but you don’t have to take our word for it.
Read about all your home improvement financing options --from traditional home improvement loans to peer-to-peer loans to cash out refinancing --and decide which is best for you!
Traditional Home Improvement Loans
These loans are financed by banks, credit unions, and a few online lenders. You’ll get a lump sum to pay for all the labor and materials for your home improvements, such as replacing your HVAC system or putting in a new pool.
Though the name implies that it's a home loan, it's not --at least not in the typical sense of the term. It doesn't consider your home equity nor does it require your home as collateral.
A home improvement loan is unsecured so you can expect a higher rate than you would with a secured loan.
Personal Line of Credit
This loan is also an unsecured loan and is collateral-free. You can use the lump sum however you wish. You can upgrade your home and set some money aside for a vacation too. Or maybe pay down some debt. They are funded reasonably fast and don’t require any equity in your home either.
However, a word of caution: the repayment period is usually shorter. This means that your monthly payment will likely be high. If you cannot afford to make high monthly payments, a personal line of credit may not be for you.
These loans are funded by a group of investors rather than a bank or the government (we’ll talk about government loans below). They go by different names, and you may have even received a flyer in the mail from these non-traditional lenders.
On the upside, these loans are also funded quickly, and you can use the money however you want. The downside, however, is that these loans have some of the highest interest rates out there.
Home Equity Loans
Home equity loans and home equity lines of credit (HELOCs) have longer repayment periods with lower interest rates than the above-mentioned loans. That means your monthly payments will be small and more of the payment will go toward the principle.
Another big bonus is that the interest is tax deductible!
The biggest risk to this loan comes with defaulting. If you’re unable to repay the loan, you put your home at risk for foreclosure.
A home equity loan lets you borrow a lump sum, while a HELOC acts more like a line of credit.
With a HELOC, you have a “draw period” during which you can withdraw money. During this time, you only have to repay interest so your initial monthly payments will be quite low. When that draw period ends, your payments will then also include the principle. A HELOC typically has a variable interest rate, so your monthly payment could still be low even after the draw period ends, but it may also increase significantly.
If you prefer a fixed rate, then you’ll want to look at interest rates of a home equity loan or ask about our fixed-rate HELOCs.
A cash-out refinance replaces your current mortgage with a new one, but this time you’ll borrow extra money to finance your home improvements. Borrowing more money means it will take longer to pay off your home, however, your new home loan may have a lower rate than your current one.
This option often requires you to have about 20% equity as well as meeting all the typical requirement of a home loan such as employment and good credit score.
FHA Title I Property Improvement Loans
If your equity isn’t high enough for a cash-out refi, consider an FHA Title I loan. This government-funded loan is for specific home improvements such as energy conservation. They cannot be used for "luxury improvements" such as swimming pools or outdoor patios. This loan caps at $25,000 with a 20-year repayment period. These loans are not widely available, so you’ll want to contact us to see if you qualify.
Want to know precisely how low your payment can be to fund your home improvement? Apply today! Use our digital home loan application and upload your docs securely in between shopping for floor tile and a new kitchen countertop!