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What is a home improvement loan?
A home improvement loan is an unsecured personal loan that you use to cover the costs of home upgrades or fixes. Lenders provide home improvement loans for up to $100,000 with rates typically between 6% and 36%.
Because you don’t put up your house as collateral for the loan, your rate is based on your credit and income information. If you can’t repay the loan, your credit will take the hit.
Should you get a home improvement loan?
A home improvement loan can make sense if you don’t have a lot of equity in your home or you don’t want to use your home as collateral.
Ideally, you can qualify for a low rate and monthly payments that you can afford for the life of the loan. Payments on home improvement loans are usually fixed, which means you can reliably schedule monthly payments into your budget.
Here are some things to consider about personal loans for home improvement projects:
High rates. Since the loan is unsecured, the interest rate may be higher than on a home equity loan or home equity line of credit, which typically have rates in the single digits.
Fast funding options. Online applications typically take a few minutes, and funds are available within a day or two at some lenders, while funds from a HELOC or home equity loan can take a few weeks. Learn how to apply for a personal loan for a smoother process.
No tax benefits. You can’t claim a tax deduction on the interest on personal loans as you might be able to do with mortgage interest.
How to compare home improvement loans
Shopping around and pre-qualifying can help you find the loan with the best rate and features. Here are some things to compare between unsecured loans.
Annual percentage rates: APRs represent the entire cost of the loan, including any fees the lender may charge. If you’re a member of a credit union, that may be the best place to start. The maximum APR at federal credit unions is 18%.
Loan amount: Some lenders cap amounts at $35,000 or $40,000. If you think your project will cost more than that, look for a lender that offers higher loan amounts.
Loan term: Loans with longer repayment terms have more affordable monthly payments than those with shorter repayment terms. But a longer repayment term also means you’ll pay more interest over the lifetime of the loan. You can use a personal loan calculator to see estimated payments on different loan terms.
Home improvement loan uses
Unsecured loans can cover almost any repair or upgrade. How much you’ll need will vary based on your location, home size and how extensive your plans are.
Americans spent a median of $6,500 on room additions and renovations in 2017, according to the most recent available data from the U.S. Census Bureau’s American Housing Survey.
Here are some common projects and their estimated median costs.
Sources: The U.S. Census Bureau’s 2017 American Housing Survey, Remodeling Magazine 2020 Cost vs Value Report, HomeAdvisor, Center for Sustainable Energy.
What are your options for financing a home improvement project?
You have a long list of options to finance your project, including a home equity loan or line of credit, cash-out refinancing or an unsecured home improvement loan to pay for your home improvement project.
Some government programs can help pay for a home renovation. The Federal Housing Administration has two programs: Title I loans and Energy Efficient Mortgages. You can look for a “Title I Property Improvement” lender in your state on the HUD website.
When it’s best: Consider applying if your project and finances meet the criteria outlined by these programs. They can help make upgrades more affordable.
Home equity loans and HELOCs
If you have equity in your home, a low-interest secured loan may be your best choice.
HELOCs have variable rates and allow you to borrow as you go and repay only what you borrow. A home equity loan, on the other hand, has a fixed rate and comes to you in a lump sum that you repay over time.
Both options are typically cheaper than personal loans, with repayment terms up to 20 years. These home-equity options use your home as collateral, meaning you could lose your house if you fail to repay.
When it’s best: If you have equity in your home, you want a low rate and longer repayment period, and you don’t mind putting your house up as collateral.
When it’s best: Consider this option if current mortgage rates are lower than the one you’re paying now.
When it’s best: You’ll need good or excellent credit (690 or higher) to qualify for a 0% APR card. If you qualify, your purchases won’t accrue interest during the promotional period, typically 12 to 18 months.