Whether you’re facing an unexpected home repair or planning a long-awaited renovation, you’re probably wondering what your financing options are. Home improvement loans (also known as renovation loans) might seem like the way to go.
But what is a home improvement loan, and are they good options for smaller projects and repairs?
What is a home improvement loan?
The first thing to know is that “home improvement loan” is really just a marketing term that lenders use to sell broader types of loans. The two most common types are secured loans that use your home as collateral, and unsecured personal loans that require no collateral. These loans can be used for a variety of reasons, home improvements and repairs being one of them.
Secured home improvement loans
Some borrowers finance home improvements by borrowing against their home equity. Your home equity is equal to the current property value minus any outstanding loans against the property (like a mortgage). Home equity increases as you pay down the mortgage and/or as the property value increases.
It’s important to note that your house is collateral for these types of home improvement loans—so if you can’t pay back the loan, the lender might foreclose and sell the house to try to recover the money.
If you want to borrow against your home equity, there are two common options:
Home equity lines of credit (HELOCs) are “revolving” debt, much like a credit card. The lender establishes a maximum credit limit based on the amount of equity in your home, and then you can borrow on an as-needed basis. You’ll typically have a multi-year window during which you can borrow—known as the “draw period”—and then you’ll shift into the “repayment period,” when you pay back the funds. HELOCs usually have variable interest rates, which means your interest rate can go up or down. You don’t have to use the money for home improvements—you could use it for a vacation or to pay down other debts—but experts say home improvements are an excellent use for HELOCs, since they ideally increase your home’s value.
Home equity loans are also based on an assessment of the equity in your home—but the money is delivered to you in one lump sum. Home equity loans usually have fixed interest rates and set maturity dates, so your payments will be the same amount each month.
Unsecured home improvement loans
For borrowers who don’t want to tap into their home equity or don’t have enough equity to cover the loan, a personal installment loan can be an attractive alternative. Personal loans can also be a good choice for smaller projects and unexpected repairs—for example, if you live in a rental and don’t have home equity to use as collateral.
The amount and terms of personal home improvement loans are primarily based on your creditworthiness—that is, the lender’s assessment of your ability to pay back debt. When it comes to HELOCs and home equity loans, your creditworthiness also plays a role, but your home equity is generally the most important factor.
Here’s how personal home improvement loans work:
- You can apply for a personal loan from an online lender, bank or credit union. Lenders will often check your credit score as part of the application process. If you’re approved, the money is usually available within a few business days—or sometimes as soon as the next business day, which can be helpful if you’re facing an emergency repair.
- Loans range from a few hundred dollars to several thousand dollars, depending on the lender.
- The loan will have a fixed interest rate and a pre-determined length, anywhere from a few months to a few years. You’ll make regularly scheduled payments, usually biweekly or monthly, and each payment will be the same amount.
- Because personal loans are unsecured—your home isn’t serving as collateral—interest rates are generally higher than for HELOCs and home equity loans. It also means you can skip any type of appraisal or valuation, which are usually required for loans secured by your home.
Other options for home improvements and repairs
Some borrowers choose to handle home improvements and repairs with traditional credit card financing—especially if they can qualify for an attractive low interest rate. Also, certain homeowners are eligible for financial help from government programs for improvements, repairs, or energy-efficient modifications.
Wondering if a personal installment loan could be a good fit for your home improvement needs? RISE offers online loans from $500 to $5,000—and we help you boost your credit with free credit monitoring and free financial wellness tools. Apply today and see your borrowing options within minutes.