Best Loan Options for Your Home Improvements

Get the Right Loan for the Job

Woman thinking about new kitchen
••• Jo Kirchherr / Getty Images

Home improvements can make your property significantly more comfortable, more efficient, and more valuable. While it’s best to save for upgrades and pay in cash, that might not be realistic. A project might be simply too expensive to pay for upfront, or you want to complete the work on a relatively short timeline.

Whatever your situation, if you need to borrow, you have several options for home improvement loans.

Personal Loans

For smaller projects, a personal loan is an easy solution. You can use the funds for anything you want, including projects that don’t qualify as “necessities.” If you’re installing sprinklers or making minor cosmetic improvements, a personal loan might be the right fit.

Cheap and easy: Closing costs for personal loans are typically quite low, especially if you keep your loan size small. The application process isn’t as cumbersome as applying for a home equity loan, and you don’t need to pay for appraisals and other services to get approved. Also, personal loans don’t require you to pledge anything as collateral.

Fast repayment: Unlike home loans that might have 15-year or 30-year repayment periods, personal loans typically last for less than 10 years. You’ll have relatively high payments, but you won’t be stuck with loan payments for the next few decades. Plus, the longer the loan, the more you'll end up paying in interest.

Interest rates: While the shorter timeline will help, personal loans often come with higher interest rates than home loans, so you’ll need to evaluate your options carefully. If you have great credit and sufficient income to repay, you might expect a rate well below 10%. Credit cards are also a form of personal loan. Rates on credit cards range from 0% promotions to more than 20% APR for borrowers with bad credit.

Home Equity Loans

More extensive projects might require more significant loans. Home equity loans, which allow you to borrow by putting up the equity in your home as a guarantee, could allow you to quickly access more cash. Home equity loans are similar but slightly different from a second mortgage.

Lower rates: By pledging your home as collateral, you should qualify for lower interest rates than you’d get with a personal loan. The tradeoff is that the consequences of default are severe. If you can’t make your payments for any reason, you risk losing your home in a foreclosure.

Large loans: Secured loans (those backed by collateral—in this case, your home) improve your chances of getting approved for large loans. If you have significant equity stored in your home, a second mortgage or home equity loan may be the only way to access those funds.

Closing costs: Borrowing against your home is rarely cheap, but second mortgages tend to be less expensive than the original mortgage (or refinancing).

Cash-Out Refinancing

Refinancing can also provide the funding you need for home improvements. Homeowners who take this route secure a newer, larger loan to replace the existing home loan. The homeowner gets the cash difference between the older loan and the new loan. This cash injection can help pay for contractors and materials.

Loan-to-value ratio: If you’re tempted to cash out for improvement projects, get familiar with your loan-to-value ratio (LTV). You need sufficient equity (home value minus the remaining mortgage payments) for the strategy to make sense. If you have minimal equity, this may not be your best option.

Refinancing costs: Because you’re getting a brand new home loan, closing costs can make refinancing expensive. Also, you’re extending the life of your loan, so the new monthly payments will mostly go toward interest payments instead of reducing your loan balance. But, if you have sufficient funds on hand, you can always pay extra and eliminate your debt early.

Home improvement programs: Some loan programs are designed to help you come up with extra money for upgrades. For example, the Fannie Mae HomeStyle Renovation mortgage allows you to buy or refinance using the “as-completed” value of the home to calculate your available loan balance.

Government Programs

If you have credit issues or limited equity, a government loan program may help you get approved. Ask your bank, credit union, or loan originator if they work with these programs:

  • FHA Title I loans allow you to borrow up to $25,000, even if you don’t have any equity in your home. If you have a manufactured home that’s considered personal property, you can get up to $7,500. Funds must go toward permanent improvements, and luxury upgrades are not allowed.
  • FHA cash-out refinancing gives you access to money you can use for anything you want, including “luxury” or non-essential upgrades. With a maximum LTV of 85% (which is lower than other FHA loans), you’ll need sufficient equity to use this program.
  • FHA 203k is another option for refinancing and funding improvements, and you can go above 85% LTV. However, the FHA limits how you use the funds and who can do the work.
  • VA cash-out refinancing allows LTVs of 100% with no mortgage insurance.

Although you can sometimes borrow without any equity in your home, that's a risky approach. You could end up owing more on the home than it's worth, and selling could be painful. It's best to borrow for projects that you're confident will pay off, or for projects required by health, safety, or accessibility guidelines.

Where to Borrow

Borrowers have a wide range of lenders that may be willing to issue the loans. Some lenders offer unique programs that might be a perfect fit for your needs—while other lenders may be unable to help you at all. The best strategy is to get a full sense of your options by shopping around and checking with institutions like:

  • Banks, including local credit unions and community institutions. Small institutions with a regional focus are most likely to offer competitive rates, and they’re typically more willing to work with customers who have less-than-perfect credit.
  • Online lenders. Marketplace lenders, including classic peer-to-peer (P2P) lending sites, can also be an excellent source for home improvement loans. Lenders on these sites often make approval decisions quickly, and their low overhead costs help keep interest rates low.
  • Specialized lenders. Some finance companies focus on particular types of home improvement projects, and it may make sense to use those sources. For example, loans for energy-efficient upgrades might be available through local Property Assessed Clean Energy (PACE) programs, or your contractor may have funding options available. Remember to compare these loans to alternatives—just because they're specialized doesn't mean they have the best rates.
  • Mortgage lenders. If you borrow against your property, you’ll need a lender that can help you refinance or get a second mortgage. Get at least three quotes and compare origination fees and interest rates to find the best deal. Check with a mortgage broker, local banks, credit unions, and online mortgage lenders for pricing.