What Is A Home Improvement Loan

What is a Home Improvement Loan?

Typically, the term "home improvement loan" refers to a personal loan that is being advertised for the use of completing home repairs, renovations, or upgrades. They may be obtained online or in person from banks, credit unions, and other financial institutions. These loans are set up as installment loans (usually with fixed interest rates) and typically come with loan terms of 1-12 years in amounts ranging from $1,000 to $100,000. Personal loans are typically easy to apply for and relatively easy to qualify for, with little to no restrictions on how the funds can be used.
There are a few other ways to finance your home improvement projects including home equity loans and home renovation mortgages like the FHA 203(k) rehab loan. Each of these loan types has their own unique set of advantages and disadvantages to keep in mind when selecting your preferred type of financing. We will cover all of these loan alternatives later on in this article.

What is a Home Improvement Loan Called?

There are many different types of home improvement loans that are available to help consumers finance their home renovation purchases and labor costs.
You may see a home improvement loan advertised as a home improvement personal loan, a home renovation loan, or a rehab loan. These terms can carry different meanings depending on the lender and the loan product. They may be set up as personal loans, home equity loans, or government-backed programs that allow you to roll up home repair costs into your mortgage.

What is a Home Improvement Loan Definition?

There is no set legal definition for what a home improvement loan is, rather it is a term that can describe any type of loan where the borrower intends to use the loan proceeds for their home.
A home improvement loan can refer to any type of financing that is designed with the purpose of helping homeowners pay for their home repairs. It may be structured as a personal loan, a home equity loan, or even as a mortgage. They can be obtained from various types of financial institutions including banks, credit unions, and even online lenders like LightStream or SoFi.

Why Choose a Home Improvement Loan?

Home improvement personal loans allow you to access cash in amounts up to $100,000 in as little as 1-2 business days with little paperwork or red tape to sort through. They typically carry lower interest rates than credit cards (although not as low as home equity loans or FHA 203(k) mortgages) and many lenders even offer personal loans without origination fees for borrowers with good credit.
They allow you to finance the costs of your home improvement projects over a period of 1-12 years with fixed monthly payments that should make your home renovation easier to afford. Your loan can also be paid off early at any time, although you should read through the fine print to see if you will be subject to any early repayment penalties or fees.
Using any of these financing options can be better than using cash upfront because it allows you to get the work done on your timeline when you need it instead of having to wait for funds or blow through all of your savings. Funding large purchases over time through a loan or other type of financing can be a smart way of paying for the major expenses in your life.
As long as you can secure a low interest rate and other beneficial loan terms, using a home improvement loan can be a wise financial choice for you and your family.

How to Use a Home Improvement Loan

To use a home improvement personal loan, you will first apply for the funds that you need from the lender of your choice. You can pursue a home improvement loan from a variety of sources including banks, online lenders, and credit unions. Once you have received your loan funds, typically within a few business days, you can use the money however you would like. Funds are usually deposited as a lump sum directly into your bank account.
On the other hand, to use the funds from an FHA 203(k) rehab loan, you will need to have the work you'd like done approved by an FHA appraiser before you begin. The work will need to be completed by a licensed contractor and completed within 6 months. All of the repairs must be deemed as eligible before the work can begin. It may also take longer to receive your loan funds, since an FHA 203(k) is a mortgage product that can only be obtained at the start of your home purchase or by undergoing a refinance.
Home equity loans are another great choice that many homeowners use to fund their home improvement projects. To use a home equity loan, you will need to have at least 15-20% equity in your home and undergo an appraisal as part of the underwriting process. Once the loan has been funded, you can typically use the funds for whatever you would like, similar to a personal loan. However, be sure to keep your receipts because the interest you pay on your home equity loan should be tax deductible if the loan proceeds are used to pay for qualifying home repairs.

What to Expect when Applying for a Home Improvement Loan

The loan application for a home improvement personal loan should be fairly simple, easy, and straight-forward. Processes can vary based on the type of loan and the lender. First, you will probably need to apply for the loan. After you apply, you should receive a prequalification. At this time, the lender may request certain documents such as proof of income and or identification. Once any stipulations have been satisfied, the lender can approve the loan and move forward with funding. If you are unable to provide requested documents or information does not match what you submitted, the lender may take back the prequalification.
Lending decisions usually rely heavily on credit score, income, and debt-to-income. Whenever possible, make sure that your credit score is as high as it can possibly be before applying for your home improvement loan. If you suspect that your credit score may not be high enough to get you approved for your loan, or to get you access to the highest rates, you can try again once it is higher, or you can consider using a cosigner. Most lenders allow co-signers and co borrowers to apply alongside loan applicants with poor credit. Cosigners and co borrowers allow the original applicant to take advantage of their higher income and credit score and place themselves on the hook for the repayment of the loan.
Once your loan application has been approved, you can expect to receive your loan proceeds within a few business days. Online lenders providing personal loans can typically fund your loan in as little as 1-2 business days, while banks and credit unions may take a bit longer.
If you are taking out a home equity loan, it may take a bit longer to receive your loan proceeds as the underwriting process must also verify the amount of equity in your home. You will likely be subject to an appraisal process. Likewise, renovation loans that are built into mortgages like the FHA 203(k) loan can take 30-60 days to close. These loans may be obtained as part of a new home purchase or even as a refinance. They come with more requirements and restrictions than personal loans but can still be a worthwhile financing option for some homeowners.

What are the Pros and Cons of a Home Improvement Loan?

There are several advantages to taking out a home improvement loan. By financing your home renovation purchases and labor costs, you will most likely be able to afford to do more than if you were relying on your savings and current income to pay for your desired home repairs.
Instead of paying for everything upfront, your home improvement projects can be paid for overtime, with a set loan repayment period and set monthly payments that fit in your budget.
There are a few different types of home improvement loans including government-backed renovation loans like the FHA 203(k) rehab loan, personal loans, and home equity loans. All of these loans offer consumers a better option than using credit cards to pay for your renovation costs. Out of the various financing options, credit cards typically hold the highest interest rates. Unless you can find a credit card with a 0% interest introductory period, taking out a home improvement loan is probably going to save you money in the long run. But be sure to compare the total picture including origination fees and other potential loan fees in order to see for sure.
In addition, credit cards typically get you access to less cash than taking out a loan would. The average credit limit is just over $30,000 while personal loans can grant you as much as $100,000 and the average homeowner has around $185,000 in equity they can tap into.
In comparison to other types of financing, a personal home improvement loan is usually the best option for most homeowners since it is unsecured and does not require any approvals or restrictions on the work being done to your home. The funds that you receive (up to $100,000) can be used on whatever you would like, even if you are completing the projects yourself. On the other hand, FHA 203(k) rehab loans and other similar loans require the work to be done by a licensed contractor and deemed as eligible before the work can begin. Home equity loans carry the lowest interest rates, but they also carry the risk of losing your home to foreclosure.
However, home improvement loans do have some disadvantages as well. You can wind up paying a great deal out of pocket for loan origination fees, closing costs, interest, and other charges. If you choose to take out a home equity loan or a government-backed renovation loan, you will have a great deal of paperwork to complete and restrictions to comply with.
One disadvantage of using a loan for your home improvement financing is that if you find the project costing more than you anticipated, you may find yourself strapped for cash and needing to take out another loan. It can be difficult to estimate upfront how much money you will need to finance before your home improvement projects begin. On the other hand, if you are using a credit card or line of credit to finance your home renovation, you have access to an ongoing source of revolving credit which may be more beneficial to your exact situation.
Lastly, depending on the loan product and loan term you select, you may wind up paying for your home renovation costs for years or even decades to come, even after you no longer live in the home! For these reasons, it may not be worth it to consider funding your home improvement projects with a loan or any other type of financing. Some consumers may decide to wait until they have the savings required to pay for all home improvement costs upfront.
In summary, here are the pros and cons of a home improvement loan.
PROS
Increase project budget
Keep savings for an emergency
No collateral required
Fixed monthly payments
Competitive interest rates
Fast funding times
CONS
Fixed loan amount
Interest and fees
Taking on debt

Is a Home Improvement Loan an Installment Loan?

An installment loan allows borrowers to repay their loan proceeds over a set period of time with consistent monthly payments. Installment loans typically also carry a fixed interest rate as opposed to a variable interest rate. While a variable interest rate can seem attractive at first, in many cases it can lead to paying more than necessary in interest over the lifetime of the loan.
Home improvement personal loans are structured as an installment loan. In fact, most loans (with the exception of payday loans) are set up this way. Home equity loans and government-backed renovation loans such as the FHA 203(k) loan are also forms of installment loans.
In contrast, other forms of financing are set up as revolving credit. This includes credit cards and lines of credit such as a home equity line of credit (or HELOC). Revolving credit allows ongoing access to an open source of funds up to a certain credit limit. On the other hand, installment loans are funded as a single lump sum that you then repay over time.
Each of these forms of financing has their own pros and cons, and which one you select for your home improvement project costs or other needs will depend on your own personal financial situation and preferences. Some consumers prefer to use credit cards because they can be paid off more quickly without the need to make payments for years. Others choose to steer clear of credit because they know they tend to overspend if they have access to revolving credit.