A Guide For Home Improvement Loans

From full-scale renovations to remodeling a single room, home improvement loans provide borrowers with ready access to funds that can finance a wide range of efforts. These loans are a common way to fund property upgrades, repairs and enhancements of many kinds.

As you explore the possibility of taking out a home improvement loan, it’s important to understand how these loans work, the types of renovation projects they can be put toward and how to go about obtaining them.

What Is A Home Improvement Loan?

A home improvement loan is designed to help you pay for any major home expenses or home improvement projects that you wish to tackle. A few of the many different ways homeowners use home improvement loans include:

• Installing a new roof
• Replacing an outdated HVAC
• Fixing a damaged plumbing system
• Buying new furniture
• Adding or updating rooms
• Building a new garage
• Installing a home addition
• Funding a DIY renovation or overhaul
• Upgrading kitchens and bathrooms

If you’re a property owner, you’ll know that fixing up, repairing or remodeling a house is often a costly undertaking. In fact, associated expenses can quickly run up to five- or even six-figure bills. At the same time though, certain home upgrades and enhancements have the potential to pay off as good home investments.

Strategic home improvements, like adding a new deck, renovating an old property or putting in marble countertops or kitchen floors can potentially increase the value of your home.

5 Types Of Home Improvement Loans

Various types of home improvement loans are available to help you fund repairs, upgrades and home improvement projects of all kinds.

1. Home Equity Loan

A home equity loan is a very helpful and lower-cost option if you’re looking to fund home improvement projects. This loan allows you to tap into the equity that you’ve built up in your home without refinancing your current loan. You may also hear this form of home improvement loan referred to as a second mortgage.

For those who’ve managed to build up a substantial amount of equity in their properties, a home equity loan could be the right solution for you. However, be advised that these types of home improvement loans are often associated with higher interest rates as well. Additionally, a home equity loan will add another monthly payment to your budget.

2. Cash-Out Refinance

A cash-out refinance allows you to tap into your home equity to fund various home improvement projects or plans. Think of it this way: Over time, while holding a mortgage, you build up equity in your home. This equity tends to accrue over an extended period as it grows with every mortgage payment that you make.

Cash-out refinancing usually offers the lowest interest of all home improvement loans. You may also qualify for an income tax deduction because you’re using your loan to fix your house.

With a cash-out refinance, you can leverage the value that you’ve built in your property to receive cash in exchange for taking on a bigger mortgage that replaces the original mortgage and doesn’t add a separate monthly payment to your budget.

For example, let’s say you’ve built up $75,000 in equity in a home but still owe $100,000. You want to make $20,000 in renovations. Utilizing a cash-out refinance, you could pull $20,000 out of your equity in the property and refinance to a new mortgage with a $120,000 balance.

3. Personal Loans

A personal loan is a loan that can generally be utilized to fund any type of expense, including home improvements. Because it’s an unsecured debt, its fulfillment isn’t tied to the value of your home, which provides a useful benefit for homeowners.

Under the terms of a personal loan, you’ll make regular monthly payments which go toward paying off your balance and paying interest charges.

If you have a good credit score (640 or above), then a personal loan could be the right fit for you. Although you may face higher interest rates and shorter repayment terms than under alternative loan options, you won’t put a lien on your home by signing up for one. Find out if a personal loan is your best option with Rocket Loans^SM.

4. Home Equity Line Of Credit (HELOC)

A home equity line of credit, or HELOC for short, allows homeowners to borrow money against the amount of equity that they’ve built up in their real estate holdings. As with other types of home improvement loans, you can utilize it to fund various home repairs and upgrades. If you choose to take out a HELOC, you’re essentially taking out a type of second mortgage.

If you’re approved for a HELOC, you’ll be given a draw period (10 years, for example) within which to pull out the money that you need on an as-needed basis. At the end of the draw period, you’ll then enter the repayment period of the HELOC, at which time you’re required to make monthly payments.

As a secured line of credit, you’ll be adding a second mortgage to your property when you agree to one and will be placing your home at risk if you’re unable to keep current with monthly payments. Rocket Mortgage® doesn’t offer HELOCs currently.

5. FHA Rehab Loan

Alternatively, as a homeowner, an FHA rehab loan can help you fund home improvement projects by bundling your mortgage and home improvement costs into a single loan.

Under this form of loan from the Federal Housing Administration (FHA), homeowners don’t have to apply for two separate loans or pay closing costs twice. Rather, they finance their purchase and home improvements together in a single effort with help from their financial lender. Rocket Mortgage doesn’t offer FHA rehab loans at this time.

Factors To Consider When Determining Which Type Of Home Improvement Loan Is Right For You

As you go about considering home improvement loan options, and which type of home improvement loan (if any) is right for you, take time to research, consider and explore all your options.

You may want to consider a few factors before deciding, including the amount of equity you’ve built up, the type of project you’re planning to use the funds for and what kind of interest rate you expect to qualify for.

Amount Of Equity You’ve Built

One factor that can help you determine which type of home improvement loan to get is how much equity you’ve built in your home.

For example, if you have a great credit score and minimal equity built up in your home, then a personal loan – despite its higher rates than alternative options – might be the best financing choice to help you fund your home improvement projects.

On the flip side, if you’ve instead already built up a substantial amount of equity in your home, then a cash-out refinance or home equity loan could be the better option.

Type Of Home Improvement Project

In many ways, the specific type of home improvement project that you are seeking to tackle will also have a large impact on what the right loan type will be for you.

For instance, if you’ve pinned down a relatively fixed budget on a single big-ticket purchase – like a roof repair or kitchen upgrade – then a one-time personal loan or cash-out refinance could be a good fit.

But if your budget is more variable and may change based on what you find behind your walls or underneath the bathroom tile, then a HELOC could provide the flexibility you might need.

Interest Rate

You’ll also want to consider how high of an interest rate you’ll get on a home improvement loan, and you’ll want to make sure you’re able to afford it. A variety of factors will come into play as your lender determines an interest rate for your loan, including your credit score and which type of loan you’re applying for, among other factors.

Your Credit Score

If you have a “good” credit score, you’ll likely receive a lower interest rate and more loan choices. But borrowers with lower credit scores will likely face higher interest rates and more limited loan options.

Type Of Loan

Different types of home improvement loans will have different interest rates attached to them. For example, a cash-out refinance is less risky for a lender and this differential will be reflected in a lower interest rate. But an unsecured personal loan comes with more risk for your lender, which will be reflected in a higher interest rate instead.

Monthly Payments

Under any circumstance, make a point to set aside time to research and review your options and ensure that the monthly loan payments and financing terms fit into your budget. The last thing that you want as a real estate borrower is to take out a loan that you can’t afford to repay.

Pros And Cons Of Home Improvement Loans

As with any form of real estate financing, there are advantages and disadvantages to utilizing home improvement loans.

Pros

• They’re able to fund a variety of home upgrades, repairs, and improvement projects.
• Home improvement loans provide different ways for individuals and families to obtain financing quickly and efficiently.
• Many options are available to fit your individual budget and financial circumstances.
• They’re widely offered by a variety of lenders in different forms.

Cons

• Such financing may require you to dip into your home equity or take out a second mortgage.
• Secured loans may put your home at risk if you fail to repay them.
• Some loan types may come with higher interest rates attached.
• Substandard credit scores and financial histories may limit your range of options.

The Bottom Line

When you hear home buyers speaking about loans for home improvements, be advised that they’re typically referring to personal loans that have been promoted under the catch-all banner of “home improvement loans.” However, other loan types qualify under this banner too – such as home equity loans, HELOCs and cash-out refinances.

One way to finance a home improvement or renovation is by using your home equity with a cash-out refinance. Start your application today to see how much you can qualify for.