A home is never really finished. That's an expression you'll hear quite often when you become a homeowner, and it's a truth you'll soon discover as soon as you step across your new home's threshold.
Projects are everywhere—from painting the trim to installing new weather stripping and the bigger renovations that take on a life of their own, like the kitchen, basement, or bathroom.
What Are Home Improvement Loans?
These overwhelming tasks make your home more valuable during reselling and more comfortable to live in come with a hefty price tag, but for that, there are home improvement loans.
These loans are specifically designed for property owners who want to increase the value of their homes through renovations and upgrades.
Home improvement loans are different from home equity lines of credit and home refinancing loans. These types of loans have more extensive term lengths and are for larger amounts of funds.
Because of these factors, home equity lines of credit and home refinancing loans are more difficult for borrowers to acquire than a home improvement loan.
There are similarities, though. In securing a home improvement loan, you'll need good credit, just as you would with a home equity line of credit, a home refinance loan, and most lending solutions, especially long-term loans from traditional lenders. The better credit you have, the lower the interest rate you can acquire from certain lenders. Lenders will see you less as a borrowing risk for a home improvement loan and reward you with your good credit history and practices with a lower interest rate.
You can acquire a home improvement loan with an interest rate as low as 3% in some cases. If you're on the opposite end of the spectrum when it comes to a credit score, you could be seeing an interest rate with your home improvement loan of up to 18% or higher. Some online lenders will have interest rates with their loans on the higher end as a cost due to the convenience borrowers have with obtaining their loans quickly and efficiently online.
For home improvement loans, the vetting process for borrowers is less stringent than that of a traditional loan. This is because the property is used as collateral to secure the loan. Should you default on your loan payments at any time, the lender can use the liquidity in your home and property as capital, selling it to make up for any losses.
But not all home improvement loans use the property as secured collateral. If a homeowner needs to make a few minor repairs with a loan, their only lending option could be an unsecured loan, meaning the property wouldn't secure the loan. The property's value wouldn't increase enough for the lender to consider using the home as collateral. Therefore the homeowner would need to acquire an unsecured loan instead. In these situations, the borrower often sees a higher interest rate with an unsecured loan because there's more risk to the lender.
Ultimately when it comes to home improvement loans, you'd want to acquire one for a big project to make it worthwhile, but for some homeowners stuck with financial difficulties, they don't have a choice.
What Are Home Improvement Loans Used For?
Homeowners use a home improvement loan to upgrade, update, and renovate their homes and property.
Subsequently, this increases the curb appeal and value of the home. For house-flippers, homeowners looking to resell sometime in the future (and it doesn't even have to be anytime soon), or for homeowners simply looking for funding to make repairs for more comfortable living, a home improvement loan is the perfect lending solution.
Home improvement loans can be used for a number of projects. You can apply for funds to start and finish your kitchen renovation, purchase a new roof, landscaping, or refinish a basement. These loans are used when other options simply don't make sense. Using a credit card to get you through a couple thousand dollar renovation or home upgrade may never get paid off, and you'd have a lower interest rate with a home improvement loan instead. Homeowners instead prefer the consistent monthly payments of a home improvement loan, knowing that they've done the research to obtain the lowest interest rate available to them.
Your Home Equity and Your Options
The amount of equity you have in your home and what you need funding for affects what type of home improvement loan. For example, if you don't have much equity—or none at all—in your home and your only need the loan for minor repairs, updates, and upgrades, you could be limited in your options. Lenders may only offer you an unsecured loan for your home improvement needs in this specific situation.
However, if you don't have much equity in your home, but you need financing for major repairs, remodeling, renovations, or updates, you have a few options for a lending solution. If your current and first mortgage rate is low, you could opt to take out a second mortgage to keep the low interest rate secured.
Suppose your current mortgage rate is higher than that of the current market value. In that case, your home improvement needs can present an opportunity to refinance under a renovation loan or cash-out refinance so you can benefit from the lower interest rates.
Alternatively, if you have a large amount of equity in your home and just need to borrow funding for small projects or repairs, an unsecured loan is still a suitable option.
You could also entertain utilizing a line of credit. For a smaller loan, it's better to have little to no closing costs.
And for a large amount of equity in your home with a need for funding to tackle major repairs, renovations, and remodels, you're often privy to a number of lending options from a traditional lender. A lender would deem you eligible for a Home Equity Line of Credit (HELOC), a second mortgage, or a cash-out refinance solution.
You can get a home improvement loan if you have bad credit, too. Not everyone has a stellar credit score, and there may be dire situations when you need financing quickly to complete repairs where there's no time to work on improving your creditworthiness for lenders.
Your options can include getting a co-signer for your loan—a friend, family member, or relative with excellent credit that will agree to the terms in writing so you can obtain a loan.
You can also apply for a USDA loan sourced by the U.S. Department of Housing and Urban Development (HUD). HUD is more forgiving with its loan approval process than conventional lenders, granting borrowers with poor credit a fair chance.
The Bottom Line on Home Improvement Loans
Home improvement loans have a wide range of lending amounts. You can get a loan anywhere from $5,000 to as high as $100,000.
Interest rates vary from lender to lender, but if you've got stellar credit and equity in your home, you have more attractive options for your financing. The term lengths on your home improvement loan will also vary, and it will depend on the amount you're borrowing. It could be as short as one year or a longer loan with a term length of seven years—or longer. You can acquire a home improvement loan from conventional lenders like banks, credit unions, or even online lenders.