Home Improvement Loan Options

Home Improvement Loan Options

Home improvement loan options include equity-based forms of financing such as a home equity loan, cash-out refinance, or a home equity line of credit (HELOC). Options also include unsecured loan options such as personal loans which are often called home improvement loans. There are also mortgage loans that include the cost of renovation in the loan such as an FHA 203(k) loan.

Which loan is best for a house that needs improvements?

The answer as to which type of loan is best will depend on your own personal financial needs. Let's explore various loan types so that you can make an educated decision.

Home improvement loan:

A home improvement personal loan is one of the most popular options for renovating your home without accessing your home's equity. Many consumers prefer to use personal loans for their home renovations due to the flexibility involved in applying for a loan and in using the funds. There are generally no restrictions on how the loan proceeds from a personal loan can be used, and funds are typically received in just a few business days. Personal loans are readily available from a variety of financial institutions including banks, credit unions, and online lenders. The application process typically takes place online and is fairly easy. Most lenders have relatively lenient requirements, and even consumers with poor credit can still benefit from a home improvement personal loan. Loan amounts are up to $100,000 with loan terms usually falling within the range of 1-12 years. Some lenders do charge an origination fee, although with a little bit of research and a decent credit score, you can avoid these fees. Interest rates sit right around 11% which is a better deal than using credit cards.

Home equity loans:

Home equity loans are another great choice for consumers who don't mind taking on the risk of equity-based forms of financing. They can give you access to even more cash than a personal loan can with lower interest rates and longer repayment periods, making your monthly payment much more affordable. Home equity loans currently have an average interest rate of approximately 6%, and typically do not come with any fees, making them a better deal than personal loans. If you have poor credit, you may be more likely to qualify for a form of equity-based financing since the loan is secured by your home and the risk is passed from the lender to you. On the other hand, any form of financing that places your home's equity on the line means that you are subject to foreclosure if you fail to repay. Additionally, you must have at least 15-20% equity in your home in order to qualify, which removes this option for many homeowners.

Cash-out refinance:

Similarly, many consumers can benefit from undergoing a cash-out refinance, which also uses the equity in your home to give you access to up to 80% of your home's equity in cash. Unlike a home equity loan, which originates a second mortgage, a cash-out refinance eliminates your first mortgage and replaces it with a new one. Homeowners can also benefit from refinancing to a lower interest rate when they pursue this type of financing. Just keep in mind that you will likely be paying off your home renovation costs for many years or even decades to come.

Home renovation mortgages:

Lastly, homeowners who are purchasing a fixer-upper or are willing to refinancing their mortgage can apply for a home renovation mortgage loan like an FHA 203(k) rehab loan. These loan programs roll up the cost of your home improvement projects into the mortgage, resulting in one convenient monthly payment and interest rate. Your home's equity is not on the line, meaning there is less risk to you as the consumer, but interest rates are still lower than other financing types since mortgages are a form of secured financing. On the other hand, FHA 203(k) rehab loans can be hard to qualify for and subject the homeowner to a variety of requirements and restrictions. You must be prepared to pay closing costs and possibly even private mortgage insurance (PMI). All work must be done by a licensed contractor, completed within 6 months, and approved by an FHA appraiser (and in some cases a HUD consultant) beforehand. Not all home repairs and upgrades are eligible for coverage, and you can't do any of the work yourself. For some consumers, this headache is not worth it. Other home renovation loans include Freddie Mac CHOICERenovation® Mortgages, and Fannie Mae HomeStyle Renovation loans.

In addition to the loans listed above, consumers can also utilize home equity lines of credit, in-house financing, and credit cards to pay for their home renovation project costs.

How Much Can You Borrow With a Home Improvement Loan?

You can borrow much more money for a home improvement loan than you might think.

While the average amount of a new personal loan is just over $7,000, if you are taking out a personal loan for home renovations, you may even be able to find lenders willing to loan you as much as $100,000. For example, the online lenders LightStream and SoFi both allow consumers to access loan amounts of up to $100,000 with low interest rates and no origination fees.

If you are using an equity-based form of financing, such as a home equity loan or cash-out refinance, you will typically be limited to receiving up to 80% of your home's equity in cash. The average homeowner has an impressive $185,000 in equity, meaning they would be able to access up to $148,000 for their financing. In some cases, you can even borrow 100% or more of your home's equity, although it is generally not recommended.

As you can see, either of these financing options can give you a pretty penny, and much more than credit cards. In comparison, the average credit card limit sits just over $30,000.

How Do You Determine Your Home Improvement Loan Needs?

In order to best determine your home improvement loan needs, you will need to ask yourself a variety of questions like:

· What does my credit score look like?

· How much money do I need to borrow?

· Do I prefer to use an installment loan or a revolving line of credit?

· How soon do I need the money?

· Do I mind having to complete paperwork or do I want the fastest access to cash?

· How soon do I want to get out of debt?

· Will I need access to additional funds later on in the process?

· Do I have any equity in my home? How much?

· Am I willing to take on the risk of equity-based forms of financing?

· Am I willing to refinance my home?

Answering these questions and having an awareness of the different types of loan options available to you will help you determine which financing best suits your needs.

For example, if you do not have any equity in your home and would like quick access to cash without any of the paperwork or red tape, a home improvement personal loan is going to be your best bet. Many online lenders like LightStream and SoFi allow consumers to receive up to $100,000 in as little as 1-2 business days with low interest rates and no origination fees.

What Are My Options for Home Improvement Loan Rates?

There are many ways for borrowers to get access to the best home improvement loan rates.

The number one thing you can do to ensure that you receive the best possible interest rate on your home improvement loan is to shop around and get prequalified. There are a number of online lenders, banks, and credit unions offering home improvement personal loans at different rates and loan terms. The interest rate you can receive can vary widely from lender to lender. Therefore, it pays to do your research and compare rates from several lenders at once before committing to one. For example, the online lender LightStream offers interest rates as low as 3.99 to 16.49% APR, making them a fantastic option for consumers who qualify. Even consumers with low credit scores can still access financing with online lenders like Prosper and Upgrade who have much more flexible underwriting and allow lower credit scores.

Credit unions often provide better interest rates than banks do when it comes to personal loans. The average rate for a personal loan from a bank in the first quarter of 2021 was 9.46% while the average rate from a credit union was just 8.86% during the same time period.

The average personal loan interest rate as of March 2022 is approximately 11%.

Keep in mind that the better your credit score, the lower the interest rate you will qualify for.

Additionally, using a cosigner or co-borrower can help you get access to the best interest rates, especially if your credit score is low. Alternatively, you can also wait until your own credit score is higher if you are in the process of paying off debt or otherwise improving your credit.

Lastly, consider using a secured form of financing like a home equity loan or line of credit. These types of financing use the equity in your home as collateral to secure the loan, making interest rates much lower for the consumer. For example, the average interest rate for a home equity loan as of March 2022 is just under 6%, much lower than a personal loan. In addition, consider using a cash-out refinance or an FHA 203(k) rehab loan to initiate a new mortgage loan that carries a lower interest rate than other types of financing like credit cards or personal loans.

Never settle for paying more in interest than you need to. By doing a little bit of research and taking the steps outlined above, you can avoid paying for high interest rates, even if you do have poor credit. There is no shortage of lenders who are willing to work with you and even give you access to lower rates.

What Does it Cost to Renovate a House?

The average cost to renovate your home will depend on what type of work is being done, what state you live in, and whether or not you do the work yourself.

According to HomeAdvisor, the average cost to remodel or renovate an entire house is from $17,959 – $76,944. With many lenders willing to fund personal loans for amounts as high as $100,000, a home improvement personal loan is one of the best ways to finance your reno.

Some of the most popular home renovations include kitchen and bath remodels, room additions, replacement of windows and doors, finishing a basement, adding a deck or porch, replacing roofing and siding, plumbing or electrical upgrades, and flooring upgrades.

Many homeowners choose to take out a home improvement loan or an FHA 203(k) loan to cover the cost of an entire home upgrade or remodel when they first purchase a fixer upper.

Undergoing renovations can increase your property value as well as your home's equity.

Therefore, the ability to finance your home improvement projects through a personal loan or other type of financing makes these renovations well worth it.

Can You Add Renovation Costs to Conventional Mortgage?

In short, you cannot add renovation costs to a conventional mortgage. It's only possible to add renovation costs into your mortgage when the lender or mortgage program allows it.

For example, the FHA 203(k) loan program allows borrowers to add the cost of their home improvements into the mortgage, which results in one single monthly payment. Other home renovation loans include Freddie Mac CHOICERenovation® Mortgages, and Fannie Mae HomeStyle Renovation loans. Keep in mind that these loan programs are all government-backed and are not conventional mortgages.

There are many advantages of utilizing a home renovation mortgage, which makes them a popular choice for many homeowners. These programs allow consumers to finance their home improvement projects with one manageable monthly payment and interest rate instead of taking out a second mortgage or pursuing a separate personal loan. This makes repayment easier and more affordable. Interest rates are typically very low for these loan programs.

Homeowners with conventional mortgages can pursue other options like a cash-out refinance or a home equity loan in order to pay for their home's renovation costs. Some private lenders may offer their own renovation or rehab mortgage loan, so double check with your lender.

How Do I Save for Home Improvements?

Alternatively, if you don't want to use any type of financing to pay for your home improvement projects, you can consider paying for your home renovation costs upfront with cash. In order to do this, you will likely need to save up for quite a while in order to amass the needed funds.

The strategies for wise financial savings will depend on your own personal relationship with money and how your family typically handles your finances. Some people choose to increase their income by taking on a second job, while others prefer to reduce their spending and take a closer look at their budget to see where they can save money on their monthly bills. For example, taking out a personal loan for debt consolidation can save you a large amount of money each month on your debt repayment, freeing up more cash to pay for your home reno.

By setting aside a fixed amount of money each month, or consistently putting aside any extra funds that you may come across, you should be able to save up the funds that you need within a short period of time. Calculate how much money you will need for your estimated home improvement costs and then decide how soon you will need the money. For example, if you need $10,000 and want to have the project completed within 6 months, you will need to save just over $1,600 for 6 months to reach your target.

If you don't think you will be able to reach your goals through saving money, consider taking out a low-interest personal loan to pay for your home improvement projects instead.