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 cash, that might not be realistic. So, if you need to borrow, you have several good 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- or 30-year repayment periods, personal loans typically last for less than 10 years. While that means you’ll have relatively high payments, you won’t be stuck with loan payments for the next few decades. Plus, stretching out payments leads to high lifetime interest costs.

Interest rates: 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 percent. But credit cards are also personal loans. Rates on credit cards vary from zero-percent promotions to more than 20 percent APR for borrowers with bad credit.

Home Equity Loans

More extensive projects might require that you borrow against the equity in your home. A second mortgage can be useful in several ways.

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 foreclosure.

Large loans: Secured loans improve your chances of getting approved for large loans. If you have significant equity stored in your home, a second mortgage 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 purchase loans (or refinancing).

Cash-Out Refinancing

Refinancing can also provide the funding you need for home improvements. A new loan can replace your existing home loan, and you can borrow a little extra to pay for improvement projects. You might not take possession of the funds—but the money is available to pay for contractors and materials.

Loan to value: If you’re tempted to cash out for improvement projects, get familiar with your loan-to-value ratio (LTV). You need sufficient equity for the strategy to make sense. If you have minimal equity, the government programs below may help you get approved.

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 instead of reducing your loan balance. But 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 provides money you can use for anything you want, including “luxury” or non-essential upgrades. With a maximum LTV of 85 percent (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 percent LTV. However, the FHA limits how you use the funds and who can do the work.
  • VA cash-out refinancing allows LTVs of 100 percent with no mortgage insurance.

Although you can sometimes borrow without any equity in your home, that's a risky approach. You may owe more on your home than it's worth, so if those improvements don't pay off, selling could be painful. It's best to borrow for projects that you're confident will pay off, or that are required for health, safety, or accessibility.

Where to Borrow

Shop among several different types of lenders. Some lenders offer unique programs that might be a perfect fit for your needs—while other lenders are unable to help you. Good sources of funding include:

  • Banks, including local credit unions and community institutions. Small institutions with a rebional 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. They make approval decisions quickly, and their low overhead and eager investors 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, energy efficient upgrades might be available through local Property Assessed Clean Energy (PACE) programs, or your contractor may have funding options available. However, it’s crucial to compare those loans to other alternatives.
  • 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 and credit unions, and online mortgage lenders for pricing.