Whether it's because you want to sell your home, upgrade your existing one, or buy a property to flip it, then you may be in
need of extra funds to complete the home improvements you have in mind.
Home improvement loans are, as the name implies, offered by lenders to consumers who plan to use that
money to fund some sort of renovation or addition that they otherwise might not have the money to pay for
it now. But keep in mind that while a lender may advertise that it offers loans for home improvements, in
reality, these loans can usually be used for any purpose.
In other words, it is doubtful that the lender will expect you to prove you used the funds for new
kitchen appliances rather than to go out to dinner!
There are two main types of home improvement loans: installment loans and revolving loans. With an
installment loan, borrowers receive a large lump sum at the beginning of the project and then make
payments until it is paid off in full. With a revolving loan or line of credit, borrowers take out the
amount they need as they need it, up to the credit limit, and can borrow more later if necessary.
Also, loans may be secured or unsecured. Secured loans require borrowers to pledge their homes as
collateral, while unsecured loans don't. If you want a secured loan, you must have at least the same
amount of equity as the loan amount you are requesting.
This may be impossible if your home's value has dropped and you are underwater. But if you do qualify,
the rates on these loans are often lower than secured loans.
To qualify for one of these loans, you should expect the lender to review your credit score as part of the
decision. The best rates go to consumers with good credit scores. When you are shopping for home
improvement loans, don't limit yourself to just loans advertised for that purpose.
You may get a better deal from a personal loan that can be used for any purpose, for example. You can
even use a low-rate credit card to fund home renovations.
Finally, if you do get a home improvement loan, be sure to ask your tax professional if you can deduct
Read on for a more in-depth look at these types of home improvement loans and the options you have as a
homeowner when it comes to getting the funds you need fast.
What You Should Know Before Getting a Home Improvement Loan
If you have any cash saved up, then it is a good idea to combine the cash with a home renovation loan or
other financing options you have discovered. Doing so may help to reduce the total amount you pay in
interest on the loan.
Do you have credit cards that offer significant
rewards on bigger purchases? If so, using credit cards to help fund your home improvement project may be
beneficial. However, pay close attention to the interest rates of your credit card in addition to the cost
of late fees in case you are unable to make a payment.
If your project isn’t substantial and will be able to be done in under $50,000, then you should seriously
consider an unsecured home improvement loan. No collateral is required for this type of home improvement
loan, and it is typically easy to apply.
However, keep in mind that the interest rate for this type of unsecured loan with no collateral may be
much higher than other financing and loan options.
An installment loan is a type of loan that gets repaid over a set amount of time within a scheduled
amount of payments. The terms of installment loans can vary greatly between just a few months or even
extend to up to thirty years. An example of an installment loan would be a mortgage or a home equity loan.
Applying for an installment loan may affect your credit for a short while. A lower installment loan
balance relative to the initial amount of the loan you borrowed, however, is good for your credit. But it
may take years to begin to pay the loan down so that the balance of the loan is lower than the original
A revolving loan is an arrangement that is made so the original loan amount can be withdrawn, repaid, and
redrawn again however many times until the arrangement has expired. An example of revolving loans includes
credit card loans and evergreen loans. The balance is self-replenishing, and it utilizes interest and
principal payments on an old loan to issue a new loan.
The Best Home Improvement Loans of 2018
Again, to determine the right financing option for your needs, you have to evaluate exactly what your
project is and how much you estimate that it will cost. Knowing this information will help you determine
which home improvement loan is best.
Home Equity Loans
loans are essentially a second mortgage for the home and are set for a fixed amount of money that
uses your home as collateral, or security, for the loan. You will have to pay the loan in monthly payments
over a fixed term just as you would your original mortgage loan. If you default on your monthly payments,
then your house can go into foreclosure.
To determine how much you can borrow with a home equity loan, lenders will usually take 85% of the home’s
value to get the loan-to-value ratio. However, some financial institutions may offer more than this.
With a home equity loan, you can experience lower interest rates, receive a larger loan amount, and use
the improvements as a deduction on your taxes.
A personal loan is an unsecured loan and largely depends on your creditworthiness as a consumer. Your
credit score, credit history, and most likely, debt-to-income ratio are also what will determine your
interest rate on the loan.
The repayment terms on a personal loan are typically under five years, and you can borrow anywhere
between $1,000 and $50,000. Along with the APR, you may also see additional
fees. The better your credit standing, however, the better the APR will be.
For this type of unsecured loan, you do not require any kind of equity, and you can borrow smaller
amounts of money to be paid over a shorter duration of time.