Ultimate Guide to Home Improvement Loans

Everything you need to know about paying for home improvements with a loan

Home improvement projects are satisfying, but they’re also a major pain. Paying to redo the kitchen, install an extra bathroom, or swap out light fixtures gets expensive fast.

Still, a healthier housing market is driving home improvement spending through the roof. In 2017, the average homeowner spent $6,649 on home improvements, HomeAdvisor reports. This year, 58% of homeowners increased their budgets for home improvement projects. And with U.S. disposable income and personal consumption on the rise, home improvement spending grew steadily throughout 2018. The Joint Center for Housing Studies of Harvard University predicts that homeowners will spend $339 billion on remodeling in the first quarter of 2019 alone. That’s 6.9% more than the previous year.

“As more homeowners are enticed to list their properties, we can expect increased remodeling and repair in preparation for sales, coupled with spending by the new owners who are looking to customize their homes to fit their needs,” says Chris Herbert, the center’s managing director.

But navigating the convoluted home improvement lending market is exhausting. Here’s the lay of the land.

Considerations

Before you borrow money for your home improvement project, here are some factors you should consider.

  • Know your costs. Get a price estimate on your renovation, broken down by cost of labor, materials, equipment rentals, and permitting. Add a comfortable buffer to account for surprise expenses. If you can’t borrow enough to cover that final figure, scale back your upgrade plans.
  • Figure out your timeline. Don’t take out a loan that requires 12 years to repay while funding improvements that you’ll need to repair in ten. The U.S. Department of Housing and Urban Development (HUD) warns homeowners to “weigh the cost of borrowing against the cost of delaying the work. If you have to borrow, you want to do it in the least expensive way.”
  • Focus on function over flair. Think twice about accepting debt for projects without much utilitarian value, like a new pool. Focus instead on immediate needs, like a faulty heating system, and then finish any incomplete spaces. These will improve your home’s value more than aesthetic updates.
  • Recoup your investment. As a rule, the simpler and lower-cost the project, the larger its cost-value ratio, says real estate data company Hanley Wood. Remodeling efforts this year recouped an average 72.5% of their investment value when the homes were sold within a year. Keep your renovations simple for higher returns.
  • Consider your limits. How much a lender will offer you depends on your credit score, your debt-to-income ratio, and your income. For home improvement projects, it’s unlikely that you’ll get more than 90% of your home’s value, minus whatever’s still owed on the mortgage.

Loan options

Unsecured loans

Unsecured loans aren’t tied to the borrower’s collateral. This appeals to consumers who haven’t built up much home equity. It’s also compelling if you don’t want to put your entire property on the line just to repair the roof.

If you need a home improvement loan, consider the most active lenders in the home improvement sector: Greensky, SoFi, LendingClub, and Lightstream. Interested? You can get quotes from all of them with this one simple form.

The Federal Housing Administration (FHA) is another option to consider. The agency insures Title 1 loans from banks and other approved lenders to fund projects that improve a home’s livability and safety. Many DIY or contractor-supervised projects fall within its purview: dishwashers built into the kitchen framework, doors widened for wheelchair access, alternative energy integration, and more. You’ll have up to 20 years to pay back the loan, and the interest may be tax deductible. Title 1 loans max out at $25,000 for existing single-family structures, with different limits for mobile and multi-family homes.

Second mortgages and refinancing

If you’d rather secure your loan with the equity in your home, consider the following options:

Cash-out refinance

Mortgage rates are fairly low — 4.87 in November compared to 6.36% a decade ago. This makes refinancing an older mortgage tempting. Cash-out refinancing replaces your old mortgage with a larger one (with lower interest rates), and gives you the difference in cash. But there are downsides to this option: high closing costs and higher interest rates than standard refinancing.

Fannie Mae HomeStyle Renovation mortgage (HSR)

This option comes from the Federal National Mortgage Association., or Fannie Mae. Fannie Mae doesn’t require a minimum expenditure, and doesn’t restrict your renovation options. Whether it’s a functional or cosmetic fix, as long as the improvement is permanently attached to your property and adds value, Fannie Mae will fund it.

Lending caps off at 95% of the home’s appraised value after the upgrades are complete. Also, borrowers will have to make a down payment — at least 5% for those with excellent credit and a single-unit home.

FHA 203(k) Rehabilitation Mortgage

This is the FHA’s version of Fannie Mae’s HSR. It’s more accepting of borrowers who can’t afford a hefty down payment or who have mediocre credit. However, these borrowers will face higher insurance premiums.

If your home improvement increases your home’s value, FHA lenders will lend up to 10% more than the current value of your home. Their loans start from $5,000, and the down payment starts at 3.5%. Learn more here.

Other financing methods

Credit

You should only finance your renovation with credit if your credit is good, your remodeling project is small, and your expenses are payable within a year and a half.

If your home improvement project qualifies for these criteria, consider signing up for a new credit card with a 0% introductory offer. This allows you to finance your project interest-free within an allotted time period. However, be wary: once the promotional period ends, your interest rates will skyrocket.

Also, many contractors don’t accept credit cards, so a loan that allows you to access cash may be preferable. Check out SuperMoney’s recommended list of credit cards here.

Home equity loans (HEL) and home equity lines of credit (HELOC)

Both HELs and HELOCs are secured by the equity in your home, giving them lower interest rates than personal loans or credit cards — often under 5%. And their payback terms are usually long, so they’re well-suited for larger or more frequent projects with budgets over $50,000. In addition, you can deduct interest accrued from a HEL or a HELOC from your taxes. But be sure to make your payments on time: if you default on these loans, your home is on the line.

What’s the difference between a HEL and a HELOC?

If you take out an HEL, you’ll receive a lump sum with fixed interest rates. Most require the principal and interest to be paid back within 15 years, though terms range from 5 to 30 years.

A HELOC works like a credit card, with a revolving open credit line that borrowers can tap as needed, up to a point. You only pay interest on the amount you withdraw, but interest rates fluctuate with the market. The timeline usually requires payment after ten years.

What’s the catch?

Unfortunately, the application process for HELs and HELOCs is fairly difficult. And borrowers need to have enough equity for such a loan to be worthwhile. Also, these loans often come with transaction, pre-payment, and closing fees.

Green grants and loans

Want to help save the environment by adding solar panels, boosting energy efficiency, or scaling back waste? Some lenders offer loans dedicated to eco-centric projects.

In California, Florida, New York, and Pennsylvania, Renew Financial offers up to $250,000 in financing for green projects. And some nonprofits and government agencies reserve grant money — which doesn’t need to be paid back — for the same purpose. DSIRE has a database of state incentives searchable by zip code. The FHA even offers an Energy Efficient Mortgage.

Choosing a lender

You don’t need to go through your mortgage lender, though if you have a good relationship with them, you may get better rates. If customer service is a priority, check out J.D. Power’s mortgage servicer satisfaction survey and reach out to the top performers.

Credit unions often offer flexible terms on renovation debt. If you’d like to pursue a credit union, you can check out some FHA-approved lenders here. Or click here for a list of some of Fannie Mae’s most efficient lenders.

There are also a ton of online lenders to consider. These lenders will consider your credit, but many will also take into account factors like your profession and education. LightStream offers its lowest rates — 4.29% with autopay — for home improvement borrowers with superb credit and substantial incomes.

And be wary of contractors offering to handling financing for you. In general, you’ll see better results if you evaluate your options on your own.

Getting started

Ready to find the right financing option for you? If you’d like to see what kind of loan terms you qualify for, click here to get quotes from top online lenders. It only takes a minute, and pre-qualifying won’t hurt your credit score.

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