Searching ...
Real Estate Tips
Tuesday, January 14, 2025

From Blueprint to Reality: Financing Your Home Improvement Plans

Every homeowner has that one project they dream about. Maybe it’s turning the outdated kitchen into a sleek culinary haven, finally repairing that leaky roof, or improving its energy efficiency. The only downside to our dreams? Home renovations can be expensive. That’s where home improvement loans come in. They make it possible to upgrade your space without draining your wallet. 

What home improvement loan options are the right move for your big plans? Get the rundown on all your renovation financing options. 

Table of Contents

What Are Home Improvement Loans?

Types of Home Improvement Loans

Personal Loans

Home Equity Loans

HELOC (Home Equity Line of Credit)

Cash-Out Refinance

FHA Rehab Loan

Other Government Loans

Credit Cards

Home Equity Conversion Mortgages for Seniors

Single Family Housing Repair Loans & Grants

Which Home Improvement Loan Is Right For You?

Tips for Getting Approved

Alternatives to Home Improvement Loans

A man wearing a cap and gloves is kneeling on the kitchen floor, working on a cabinet with tools scattered around him. The floor has a wood-like design, and teal hexagonal graphics are overlaid with "ez" text inside a house icon.

What Are Home Improvement Loans? 

At their core, home improvement loans are exactly what they sound like—financing designed to fund property renovations and upgrades. These loans make the dream of a full-blown bathroom remodel or an entryway ramp for accessibility happen much faster than saving every penny over the next decade. 

No home improvement loan is one-size fits all. Like the traditional mortgage market, these loan options change their terms depending on your needs and financial situation. The common idea? Take the stress out of paying for projects upfront and repay in monthly installments over a set time frame. 

They allow for a wide range of updates like:

  • Kitchen remodels 
  • Roof repairs 
  • Energy-efficient upgrades (think solar panels or better insulation) 
  • Fixing home damage
  • Additional rooms or home extensions 

Basically, if you’ve got a vision for your home, chances are there’s a loan that can help fuel it. 

Types of Home Improvement Loans 

Thanks to this variety, there’s a loan option out there that can surely help with your home renovation. Here’s a cheat sheet on ways to fund a home improvement project. 

Personal Loans 

A personal loan is great for smaller projects, as loan amounts may range from about $1,000 to $100,000. Personal loans are typically fixed-rate loans, allowing you to budget easily, thanks to consistent monthly payments. However, they often have higher interest rates than other loan options and shorter repayment terms.

These are unsecured loans, meaning no collateral is required. For some, that’s especially appealing, as it comes with a straightforward application process. You can have funds in as little as one business day, which is great for urgent repairs.

However, the downside is those higher interest rates and potential loan application fees. Personal loan rates in late 2024 were starting at 6.94% at the national average, and climbing to 24.29%. Repayment terms can be between one and five years. You’ll need a solid credit history to qualify. Many financial institutions have personal loan programs, so speak to multiple loan officers as you shop around for the best match of eligibility requirements, competitive rates, and loan terms.

Text on image: "In 2023, only 3% of homeowners used unsecured loans to pay for home renovations." White text on a dark teal background with a small hexagonal logo at the bottom.

Home Equity Loans 

Perfect if you’ve built significant equity in your home and prefer a lump sum payout for a major renovation project. You borrow a lump sum against your home’s equity, making your home collateral.

Interest rates are lower than other home improvement loan financing choices and have the added benefit of a fixed payment you can plan for. Repayment terms often span from 5 to 30 years, offering flexibility and manageable monthly payments.

Another advantage? Home equity loans are tax-deductible as long as the funds are used for home improvement. The deduction limits depend on the tax year and your filing status. If you can, keep all your receipts itemized. If the loan funds aren’t used to improve the property, they may not qualify for a tax deduction. Talk to your tax advisor about interest deductions.

On the downside, your home serves as collateral. A home equity loan becomes a second mortgage on your property, creating two mortgage payments instead of one. You must repay the home equity loan and the original loan to avoid possible foreclosure.

The home equity loan amount is also limited based on your home equity and other qualification factors, such as your credit score and income. The loan application process requires a third-party home appraisal to establish its current market value. The approval may take anywhere from two weeks to two months.

HELOC (Home Equity Line of Credit) 

Think of this as a credit card for home projects. You draw funds as needed up to a set limit and only pay interest on what you use. A line of credit is flexible but requires careful budgeting.

Interest rates may be lower with a HELOC than a home equity loan. Their flexibility makes them another bonus if you’re unsure how much you will spend on the home renovation. Since you only draw what you need, it can buffer the unexpected costs that could arise during a major renovation.

They can also be tax deductible when used for home improvements. However, loan proceeds can be used to fund other ventures, too, and not all of those have tax deductibility. Consult with a tax professional.

HELOCs also limit the maximum loan amount by how much equity you have in the home, credit history, and income. Some HELOCs use variable interest rates, meaning the repayment amount could change. And, because the home is collateral, not making payments puts you at risk of foreclosure.

Cash-Out Refinance 

With this loan option, you’ll refinance a home mortgage for more than you owe and pocket the difference to fund renovations.

This may have the added benefit of securing a lower mortgage rate, but it also resets your loan repayment term.  Since it’s a whole new home loan, you must repeat the entire mortgage application process. That means loan origination fees, home appraisals, and closing costs. If mortgage rates are higher now than your original loan, it may not be worth it.

The cash-out amount will also hinge on how much home equity you’ve built up over the years. Loan approval is subject to your credit score, annual household income, and debt-to-income ratio. On the bright side, you’ll only have one monthly mortgage payment unlike getting a second mortgage.

FHA Rehab Loan

This program, also known as FHA 203(k), is an option for those possibly purchasing a fixer-upper or updating their existing home. The loan combines the cost of the home loan and renovation expenses into one mortgage.

There are two types of FHA rehab loans:

  • Standard: Covers significant renovations with a maximum cap dependent on property location. Minimum loan amount for renovation is $5,000.
  • Streamline: Also called a limited loan, the amount is for $5,000-$35,000 and targets smaller cosmetic changes 

The standard 203(k) has strict requirements and inspections, whereas the limited 203(k) allows for more flexibility. Standard loans are better if the home needs vital upgrades totaling over $35,000, like foundation repairs, new roofing, HVAC systems, and the like. The limited loan caps the maximum amount at $35,000. It’s intended for smaller changes, like buying new appliances or new paint on the exterior and/or interior. Neither are to be used for non-essential accessories like installing a swimming pool or an outdoor kitchen area.

Under the FHA home improvement loan program, current property owners don’t need as much equity in the home to qualify. Some homeowners can borrow up to $7,500 as an unsecured loan, meaning you won’t put your home at risk. It also has no minimum credit score or income requirements.

Both versions require the borrower to pay a mortgage insurance premium (MIP). The program requires evidence the loan was used for qualifying home improvements, such as repairing plumbing, flooring, or curb appeal work. Licensed contractors must do the work.

Since it combines a mortgage with a renovation, you’ll need down payment funds and to go through the loan application process. Be ready for the significant documentation and potential fees. The timeline to close will be beyond 15 days. However, the FHA 203(k) loan may be worth it if your dream home needs some TLC.

Other Government Loans 

Similar to the FHA Rehab Loan, the US Department of Veteran Affairs (VA) and US Department of Agriculture (USDA) have programs to ease the financial burden of necessary renovations for eligible borrowers. These home improvement loans are typically geared toward specific needs, such as making energy-efficient improvements or assisting first-time homeowners in buying a fixer-upper home. 

For qualified borrowers, these USDA and VA renovation loans have looser financial requirements to buy and renovate a home. It takes additional steps before purchase, like getting itemized quotes from a home contractor for any repairs or improvements. Any home renovation improvements funded under government programs must improve its livability and be done by approved contractors. The timeline to securing funds is several weeks to months.

Credit Cards

The image displays text: "In 2023, 37% of homeowners paid for home renovations with a credit card." The background is dark with abstract geometric patterns, and there is a small hexagonal logo at the bottom containing the letters "ez.

Credit cards are a convenient way to fund a home improvement but are risky. These unsecured lines of credit mean you don’t need to go through the loan approval process with a mortgage lender. They’re convenient and flexible, as you can use them as needed. The companies entice you with points and credit card rewards. Some companies may offer low introductory rates better than mortgage interest rates.

While using a credit card might seem quick and easy, financing home improvements is generally not recommended. Credit card rates are often high, leading to potentially spiraling debt if you can’t pay off the balance quickly. Unanticipated expenses may push you past the credit limit.

Other things to look out for are credit card fees or when the introductory rate expires. When it does, that actual rate will kick in. The average credit card rate in December 2024 hit 20.79%. High-interest credit cards can be beyond that.

This can put you at risk of default and increased financial strain. If you must use a credit card, limit its use to smaller projects and prioritize paying off the balance as soon as possible. It may also impact your credit score, as you’ll have a higher credit utilization ratio and debt.

Home Equity Conversion Mortgages for Seniors

Home Equity Conversion Mortgages (HECM) are a type of reverse mortgage available to seniors aged 62 and older. This option allows homeowners to access the equity in their homes without requiring monthly mortgage payments. Instead, the loan is repaid when the homeowner sells the home or moves out permanently. It can be an excellent way for seniors to fund home improvements that enable them to stay in their beloved homes.

Single Family Housing Repair Loans & Grants

The Single Family Housing Repair Loans & Grants program under the USDA Section 504 can be a lifesaver for those in eligible rural areas. This program loans very low-income homeowners essential funds to repair, improve, or modernize their homes. The loan has a maximum limit of $40,000. The terms are highly favorable, with loans offering a long repayment period and an interest rate fixed at 1%.

There are also grants available for seniors to remove health and safety hazards, up to $10,000.  The grants don’t need to be repaid. Some home improvement loans or grants are for specific purposes, such as new windows or roofing. The grant and loan can be combined.

Which Home Improvement Loan Is Right For You? 

As you can see, each type has its benefits and requirements. The costs on loans depend on the loan amount, interest rate, and if there are closing fees. Research the programs and determine which is right for you based on your specific needs and financial situation.

Remember that any form of borrowing should be done responsibly, carefully considering the repayment terms and long-term effects on your finances. It’s always a good idea to consult with a financial advisor or mortgage professional before deciding to finance home improvements. With the right loan choice and responsible management, you can turn your house into your dream home without breaking the bank.

Before signing on the dotted line, weigh the pros and cons of home improvement loans.

Pros 

  • Quick Access to Funds: No endless months of saving. 
  • Increase Property Value: Renovations often add value to your home. 
  • Fixed Payments: Predictable monthly payments make budgeting easier. 
  • Potential Tax Benefits: Loans tied to your home (like HELOCs) may offer tax perks

Cons 

  • Interest Rates: Depending on your credit and loan type, rates can be steep. 
  • Secured Loans Carry Risk: Defaulting could mean losing your home. 
  • Fees and Penalties: Some loans have application fees or early repayment penalties. 

Home Improvement Loan Rates

Based on national averages for December 2024, going rates on common home improvement loans were:

Personal Loan7.4-35.99%
Home Equity8.08%-9.49%
HELOC7.93%-10.31%
FHA Rehab5.99%-7.99%
HECM6.85%-7.98%
Section 5041%

These do not include the Annual Percentage Rate (APR).

How to Choose the Right Loan 

Picking among the types of loans might feel like finding the perfect wall color—daunting but critical to your financial health. Follow these steps: 

Assess Your Project Scope: Big home remodeling project or just replacing some old carpet? Different loans suit different types of projects. 

Check Your Financial Health: An excellent credit score unlocks better rates. Know where you stand before applying by requesting your annual free credit report. 

Shop Around: Lenders vary widely regarding interest rates and repayment options. Don’t shy away from comparing offers. 

Think Long-Term: Can you realistically afford the monthly payments? Loans are a marathon, not a sprint. 

Tips for Getting Approved 

Want to increase your home improvement loan approval chances? Here’s the game plan:

Boost Your Credit Score: Pay down existing debt, fix errors on your report, and keep credit utilization low. 

Prepare Your Paperwork: Most home improvement lenders need proof of income, renovation plans, and other documentation. 

Work with Trusted Lenders: Stick with reputable names to avoid shady fine print and mortgage scams

Get Pre-Approved: This helps you understand your loan qualifications before making any commitments. 

Alternatives to Home Improvement Loans 

If a traditional loan doesn’t feel right, no worries—there are other routes to consider. 

Save and Pay in Cash: The old-school way! If your project can wait, save until you can pay outright (joyful debt-free living included). 

Government Grants: Low-income earner? Check if you qualify for local or federal assistance programs, especially for energy-efficient or critical home repairs. 

The Bottom Line 

A home improvement loan can be the perfect way to transform your living space, boost your property’s value, and finally tackle that dream project you’ve been putting off. But just like choosing the ideal color combo for your walls, it’s all about finding the option that fits you best. 

Plan thoroughly, research your options, and keep your financial health in mind. After all, the goal is to make your house a home—not a source of stress. 

Thinking about your next renovation project but unsure how to get started? Take the first step today and explore the loan options that can make your dream a reality.

Start Your Home Search

Preston Guyton