You’ve achieved the American dream of home ownership, but you need to make some improvements to get it to look the way you want. Maybe your kitchen and master bathroom needs updating, or you’d like new floors in your living room.
This all costs money, which is why you’re searching for ways to get home improvement loans. Fortunately, you have several options to finance those exciting new projects.
What is a home improvement loan?
A home improvement loan is any source of cash that you designate for your renovations or home repairs. Some home improvement loans, such as those that are government-backed, must provide details about what the projects involve. Other loans, such as a personal loan, don’t have this requirement.
How to pay for home improvement projects
Remodeling in the United States is a booming $300 billion annual industry. If you want to pick out paint swatches and backsplashes with the rest of America, you’ll need access to some ready funds.
Your best source of cash for home improvement projects is savings. Obviously, this isn’t an option for everyone, and you might need some renovations done sooner to make your space more livable.
When to choose a personal loan for home improvement
A personal loan for your home improvement projects is a good choice in several circumstances. Personal loans are unsecured term loans, so you won’t have to pledge your home as collateral like you would with a HELOC. While the interest rates might be higher than what you’d find with a HELOC, a personal loan is also the best choice if you don’t have sufficient equity in your home to use for additional financing.
A personal loan also has a fixed interest rate and a longer payback term, which makes it a better choice than most credit cards. You can fit the monthly payments into your budget and schedule your payoff for two to five years out.
Having said that, balance transfer credit cards with a 0% APR introductory rate can be a better deal than personal loans if you can repay your balance within the 0% APR period. More on balance transfer cards later.
Where to get personal loans for home improvement
You have several options to apply for personal loans for your home improvement projects. You can check with your bank, but your local credit union is probably a better place to get approved for funding. They have affordable rates and often work with those who have credit challenges.
Other sources of personal loans for home improvement are some federal programs and various types of online lenders.
Online personal loans for home improvement
Since the 2008 housing crisis, many homeowners are still underwater on their homes. If you owe more on your home than its market value, that includes you. Some valuable upgrades could put you back into positive equity territory with your home.
Personal loan approval and terms are based on your personal credit, income, and debt-to-income ratio. If you don’t know your personal credit score, you can get it for free here.
Online personal loan lenders for home improvement projects
One of the top online personal loan lenders is SoFi. SoFi offers great rates, but they also have strict lending requirements. The average SoFi borrower has a credit score of 780 and income of $150,000.
SoFi’s personal loan terms vary depending on credit. Fixed rates start at 5.49%. Loans range from $5,000 to $100,000, with up to 7 years for repayment. There are no loan origination fees and no prepayment penalties with this lender.
If you have excellent credit and plan to use all of your funds for home improvement, apply for a personal loan with LightStream first. LightStream has personal loans from $5,000 to $100,000, with annual percentage rates (APRs) for a home improvement loan from 4.29% to 11.54%. There are no loan origination fees and no prepayment penalties with LightStream. The application process is entirely online, and they fund some loans within the same day.
Lending Club is another online lender to consider. It is the world’s largest lending marketplace for personal loans and has funded more than $22 billion in loans for nearly two million borrowers.
Lending Club works as a marketplace that matches lenders and borrower. Borrowers get a score based on factors such as income, credit, and debt-to-income ratio. Your score determines your APR.
APRs with Lending Club range from 5.99% to 35.89%, and there is a loan origination fee that starts at 1%. Loans range from $1,000 to $40,000 and repayment terms of up to 60 months. There is no prepayment penalty with one of these loans.
Home improvement loans for bad credit
If you have poor credit and need a home improvement loan, you might still have a few options. However, the interest rates will be high, so consider whether it is the best time to start a large home improvement project. If you’re determined to get a home improvement loan with bad credit consider these lenders first.
If you can’t qualify for a personal loan by yourself you can try to get a personal loan with a co-signer. Another option is to look at secured personal loans, where you pledge an asset as collateral to guarantee the loan.
Federal programs for home improvement loans
A Title I loan is a home improvement loan up to $25,000 made by a HUD-authorized lender. You don’t need any equity in your home to qualify for the loan. The lender will base the loan’s interest rate on your creditworthiness, and repayment terms are as long as 20 years. You can use a Title I loan to upgrade your home and make it more livable, but not for luxury items, such as swimming pools.
An Energy Efficient Mortgage (EEM) is a program that allows you to finance certain energy efficiency improvements to your home. If you plan to upgrade your HVAC system, replace a roof, upgrade insulation, or install solar panels, this might be an ideal choice.
An EEM allows you to “stretch” an FHA mortgage to finance energy improvements that will pay for themselves with dollars saved. This mortgage is available through most FHA-approved lenders.
While an EEM can give you access to additional cash for certain projects at a reasonable rate, there are a few downsides. The types of home improvement projects that you can finance will be more limited. Also, it is a mortgage so there is some red tape and you may have additional costs for inspections and closing.
Other methods of financing home improvement
The method you choose to finance your home improvement projects will depend on your personal credit, the projects you have planned, and the equity you have in your home.
If you have excellent credit, you can probably qualify for 0% introductory interest credit card. Balance transfer credit cards make sense if you have the means to pay off the balance within the introductory period, which is usually 12 to 18 months. If you plan to take longer, a personal loan is still your best bet.
A home equity line of credit (HELOC), which we mentioned earlier, is another option if the conditions are right. You need to have sufficient equity in your home to qualify. HELOCs typically have a variable interest rate, so your payments might change depending on market conditions.
Another option is a home equity loan, which you can secure at a fixed interest rate. This product also requires that you have equity in your home. A benefit of any type of home loan is that the interest payments are tax-deductible. The downside is that these loans are secured by your home, so defaulting puts your home at risk.
Comparing personal loan options
When you’re looking for home improvement loans, shop around to get the best deal. The APR offered is important, but there are other things to consider also. Look out for hidden fees, such as prepayment penalty fees, so you don’t get any surprises when it comes to repaying your loan.
Also, it might be tempting to borrow more than you need just because you can, but this could be a mistake. Decide how much you need for your home improvement projects, and only borrow what you can comfortably afford.
Ready to compare personal loan options for home improvement?