Renovating your home can be an exciting project, but it often comes with a hefty price tag. With the average bathroom remodel costing over $12,000 and a major kitchen overhaul running upwards of $35,000, financing is usually necessary to turn your dreams into reality. Thankfully, there are several types of renovation loans available to fund your next home improvement project.
In this comprehensive guide, we’ll explore the most common types of loans for financing renovations. Whether you need a couple thousand for a minor remodel or want to take on a whole-house overhaul, there’s likely a loan option that fits your needs and budget.
Home Equity Loan
A home equity loan allows you to borrow against the equity you’ve built up in your house. Often called a second mortgage, this type of renovation loan provides you with a lump sum of cash upfront that can be used for any purpose.
With a home equity loan, you’ll make fixed monthly payments over a set repayment term, usually between 5-30 years. Interest rates are typically quite low, often below 6%. You can generally borrow up to 85% of your home’s value minus what you owe on your existing mortgage.
Pros:
- Low fixed interest rates
- Lump sum payment
- Lengthy repayment terms
Cons:
- Closing costs of 2-5%
- Second monthly loan payment
- Limited to your home’s equity
Home equity loans work well if you need a large amount of cash for a major renovation like a kitchen overhaul or addition. But the upfront lump sum means you’ll need to budget carefully
HELOC
HELOC stands for home equity line of credit. With a HELOC you’re approved for a revolving credit line secured by your home’s equity. It’s like having a credit card linked directly to the value of your house.
You can draw against your HELOC whenever you need up to your approved limit. You’ll only pay interest on what you actually spend, making payments on the outstanding balance each month.
Pros:
- Access cash as needed
- Only pay interest on what you use
- Revolving balance
Cons:
- Variable interest rates
- Repaid in 10 years
- Lower borrowing limits
HELOCs are extremely flexible but do come with the risk of rising interest rates. They work well if you have ongoing or staggered renovation plans. You can borrow what you need when you need it, up to your credit limit.
Cash-Out Refinance
With a cash-out refinance, you take out a new mortgage loan with a higher balance than your existing one and pocket the difference in cash. This converts your home equity into spendable money.
The cash from a refinance can be used to fund renovations or any other purpose. You wind up with a single new mortgage payment at a lower rate.
Pros:
- Lower mortgage rate
- One loan payment
- Receive cash lump sum
Cons:
- Costs similar to new mortgage
- Restarts loan repayment term
- Closing costs of 3-6%
A cash-out refinance works best if interest rates have dropped significantly since you originated your current mortgage. You can tap equity and save on your monthly payments simultaneously.
FHA 203(k) Loan
The FHA 203(k) loan is a mortgage insured by the Federal Housing Administration specifically for financing home purchases combined with renovations.
With a 203(k) loan, you buy a fixer-upper property then bundle rehab costs into the mortgage. Only 3.5% down is required, and funds are disbursed as work is completed.
Pros:
- Finance home & renovation
- Low down payment
- Only one set of closing costs
Cons:
- For older homes only
- Ongoing mortgage insurance
- Minimum $5,000 renovation
203(k) loans are tailored to those buying dated properties in need of significant improvements. But the program does come with more complex processes and requirements compared to conventional loans.
Personal Loans
Personal loans provide a set amount of cash that’s repaid in fixed monthly installments over 2-5 years. You can use personal loans for virtually anything, renovations included.
These unsecured loans are easy to qualify for but do come with higher interest rates. Excellent credit in the 720+ range will get you the lowest rates on a personal loan.
Pros:
- Fast funding
- Few eligibility requirements
- Fixed monthly payments
Cons:
- Higher interest rates
- Short repayment terms
- Strict late fees
Personal loans work if you need a small amount of cash quickly for minor home improvements and don’t have equity to leverage. But carefully compare rates and fees from multiple lenders before applying.
Credit Cards
Finally, everyday credit cards can be used to finance renovations in a pinch. You simply make purchases on the card, then repay the balance monthly like you would for any other expense.
Most cards come with 12+ month 0% intro APR offers, allowing you to pay down your balance over time without incurring interest initially.
Pros:
- 0% intro APR periods
- Rewards on spending
- Quick access to funds
Cons:
- High ongoing rates
- Low credit limits
- No fixed repayment schedule
Credit cards offer an extremely convenient option for small home improvement projects. But interest rates spike after the 0% intro period ends, so this works best if you can pay off your balance quickly.
How to Choose the Best Renovation Loan
With so many loan types available, picking the right option for your remodeling project can seem daunting. Here are a few key factors to consider when selecting a renovation loan:
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Available equity – If you have significant untapped equity, leverage it through a HELOC, home equity loan, or cash-out refinance to get the lowest rates.
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Credit score – Your creditworthiness determines the rates and terms lenders will offer. Excellent credit unlocks the most favorable loan options.
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Loan amount – Certain loans like personal loans and credit cards have lower borrowing limits. Make sure your lender offers enough to cover your renovation budget.
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Interest rates – Compare both short and long-term rates across multiple lenders to find the most affordable financing.
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Fees – Look for low or no origination fees. Closing costs vary significantly between loan types.
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Repayment term – A lengthy repayment term keeps monthly payments low but increases total interest paid over the life of the loan.
Carefully considering these key factors will help you identify the optimal loan for financing your next home renovation project.
Tips for Getting Approved
Once you’ve decided on the best loan type for your needs, here are some tips to boost your chances of getting approved:
- Maintain a credit score over 700
- Lower your debt-to-income ratio
- Avoid taking on new debt before applying
- Verify income with paystubs and W-2s
- Gather bank statements to confirm assets
- Be cautious about applying with multiple lenders
Meeting these criteria shows lenders you’re financially responsible and ready to take on a renovation loan. Having your financial documentation ready will also help streamline the application process.
Popular Renovation Loan Lenders
Many banks, credit unions, and online lenders offer loans for financing home renovations. Here are some of the most popular places to get a renovation loan:
Banks
Wells Fargo – Offers home equity loans, HELOCs, and personal loans
Bank of America – Competitive rates on home equity financing
Citibank – National lender with loan options for all credit tiers
Credit Unions
Alliant Credit Union – Top-rated not-for-profit credit union
Pentagon Federal Credit Union – Excellent rates for members nationwide
BECU – Digital applications with low rates on home equity loans
Online Lenders
Lightstream – Low-rate personal loans with same day funding
LendingClub – Peer-to-peer lending marketplace with quick turnaround
Upstart – Uses alternative data for credit decisions on personal loans
The Bottom Line
Finding the right loan for your home renovation project is crucial. The mortgage experts at [Company] can guide you through the process of identifying the optimal financing option based on your unique situation.
Whether you need a conventional loan, government-backed mortgage, or specialty renovation loan, we’re here to help. Our loan advisors have decades of combined experience assisting homeowners across the country realize their renovation dreams.
Reach out for personalized guidance on choosing and getting approved for the ideal renovation loan. Our team is standing by ready to answer your questions and provide tailored recommendations at no cost. Let’s chat about how we can help finance your next home improvement project!
How do home improvement loans work?
So, you’ve decided to spruce up your home, and you’re considering a home improvement loan. But how do they work? Once you’re approved, the lender will give you the money in a lump sum. You start repaying the loan almost immediately, usually in fixed monthly installments. The interest rate you’ll pay depends on various factors, including your credit score and the lender’s terms.
Be mindful of additional costs like origination fees, which can range from 1% to 8% of the loan amount. Unlike a credit card, where you can keep using the available credit as you pay it off, the loan amount is fixed. If you find that you need more money for your project, you’ll have to apply for another loan, which could affect your credit score.
HELOC (home equity line of credit)
A Home Equity Line of Credit (HELOC) is another option for tapping into your home’s equity without going through the process of a full refinance. Unlike a standard home equity loan that provides a lump sum upfront, a HELOC functions more like a credit card. You’re given a pre-approved limit and can borrow against that limit as you need, paying interest only on the amount you’ve actually borrowed.
While there’s more flexibility because you don’t have to borrow the entire amount at once, be aware that by the end of the term, “the loan must be paid in full. Or the HELOC can convert to an amortizing loan,” says Ailion. “Note that the lender can be permitted to change the terms over the loan’s life. This can reduce the amount you can borrow if, for instance, your credit goes down.”
The pros of a HELOC include minimal or potentially no closing costs and loan payments that vary according to how much you’ve borrowed. It offers a revolving balance, which means you can re-use the funds after repayment. This type of home improvement loan may be ideal for ongoing or long-term projects that don’t require a large sum upfront.
“HELOCs offer flexibility, and you only pull money out when needed, within the maximum loan amount. And the credit line is available for up to 10 years, which is your repayment period.” Leever says.
A cash-out refinance is a viable option if you’re considering home improvements or other significant financial needs, like debt consolidation. Opting for a cash-out refinance involves taking on a new, larger mortgage than your existing one and then pocketing the difference in cash.
This cash comes from your home’s value and can be used for various purposes, including home improvement projects like finishing a basement or remodeling a kitchen. However, the money can also be used for other things, like paying off high-interest debt, covering education expenses, or even buying a second home. Doing a cash-out refinance is most beneficial when current market rates are lower than your existing mortgage rate.
The advantages of going for a cash-out refinance include the opportunity to reduce your mortgage rate or loan term, which could potentially result in paying off your home earlier. For instance, if you initially had a 30-year mortgage with 20 years remaining, you could refinance to a 15-year loan, effectively paying off your home five years ahead of schedule. Plus, you only have to worry about one mortgage payment.
However, there are downsides. Cash-out refinances tend to have higher closing costs that apply to the entire loan amount, not just the cash you’re taking out. The new loan will also have a larger balance than your current mortgage, and refinancing effectively restarts your loan term length.
This is THE Best Home Renovation Loan Program – HomeStyle Loan Explained
FAQ
What is an FHA 203k loan?
Are renovation loans hard to get?
What is a renovation loan?
Unlike other types of loans, many renovation loans are based on a home’s after-repair value (ARV), or its estimated value once renovations are complete. While similar to a construction loan, a renovation loan is used for home upgrades or adding onto an existing home, rather than building one from the ground up.
What are the different types of home improvement loans?
The most common types of home improvement loans are: personal loans, home equity loans, and home equity lines of credit (HELOCs). Personal loans are a popular choice for home improvement projects. In fact, you can use several different types of financing as a home improvement loan.
What are the different types of renovation loan options?
There are multiple loan options for people who want to borrow money to improve or renovate their home. Home equity loans and HELOCs are types of loans that use your home as collateral and can have tax advantages. Loans that don’t rely on home equity are also an option, but typically have higher interest rates.
How is a home improvement loan different from a renovation loan?
Home improvement loans and renovation loans are sometimes used interchangeably, but there can be subtle differences. Home improvement loans are more flexible and can be used for any type of home project, from installing a new roof to landscaping.