In this article, we explore what exactly home improvement loans are, what you can expect in regard to terms and rates, and other frequently asked questions, so you can make the right choice for you.

What Are Home Improvement Loans?

Home improvement loans refer to any type of loan that is used to fund renovations, repairs, or upgrades to a property. Home improvement loans can either refer to secured products, such as a home equity loan or HELOC that use your home as collateral for the loan, or unsecured products, such as personal loans. Home improvement loans can also include:

  • Cash-out refinance.  
  • FHA 203(k).
  • Construction loans.
  • Credit cards.

What Are Typical Interest Rates for Home Improvement Loans?

Typical interest rates for home improvement loans range from 5% to 36%, based on several factors, including the amount of risk a borrower may pose to a lender. Personal loans will often be higher given there is no collateral like a HELOC or home equity loan.

Different lenders will also offer the choice between fixed and variable interest rates. Some lenders offer fixed rates for consistent payments throughout the loan term, while others propose variable rates that fluctuate based on market conditions. 

Various factors influence home improvement loan rates, such as your credit score, the loan amount, and the loan term. A higher credit score or reliable credit history generally gives you lower interest rates. Some lenders actively advertise competitive rates to attract potential borrowers. These competitive rates could provide an opportunity to secure financing for your home renovation projects at more favorable terms. Understanding what influences interest rates and comparing offerings from various lenders helps you make an informed decision.

What Are the Typical Loan Amounts?

Home improvement loans range from just a few thousand dollars to over $100,000. Some lenders may offer up to $500,000 for extensive home improvement projects. The loan amount depends on various factors, such as your property’s value, the equity you’ve built up, your financial situation, and the nature of the project. Based on these details, lenders might establish varying minimum and maximum limits for home improvement loans as well. 

RenoFi stands out by increasing your borrowing power for funding home renovations. Unlike traditional lenders who often cap borrowing based on the equity built in your current home, RenoFi leverages the future value of your home after renovations are complete, not just the current equity, which allows you to unlock significantly more borrowing potential — up to 11x more. We partner with credit unions to help you secure the lowest rates and the best terms.

How Are Loan Amounts Determined for Home Improvement Loans?

The specific loan amount you’ll be able to borrow for your home improvement loans depend on several factors, including the type of loan, the lender, the balance remaining on your mortgage, the value of your home, your location, and your credit score. Traditional lenders assess your home’s value and available equity to determine how much you can borrow. They also consider your financial stability, income, credit history, and debt-to-income ratio. These evaluations ensure you receive suitable financing for your renovation goals and budget. A general rule of thumb is that you’ll be able to borrow about 80-90% of your property’s value to finance your renovations. 

RenoFi makes it possible for you to significantly increase the amount you can borrow, regardless of the home improvement loan you choose. In fact, the average homeowner is able to boost their borrowing power by 11 times because RenoFI Loans use the estimated after-renovation value of your home instead of its current value.

How Long Are Home Improvement Loans: Repayment Terms 

The terms of a home improvement loan vary depending on the type of loan. Personal loans typically have shorter terms of two to five years, meaning a quicker pay off, but higher interest rates. Home equity loans have much longer loan terms of up to 30 years with equal monthly payments for the life of the loan. For HELOCs, your lender will set the draw period of about 5-10 years, in which you can access your available credit while only paying interest on the loan.

How Interest Rates Impact Loan Length 

The choice between shorter and longer loan terms offers a trade-off. Longer terms often mean reduced monthly payments but at the expense of paying more interest over the entire loan period. If you do have the means to pay off the loan quickly, a shorter repayment period means less accrued interest. 

Some lenders offer flexible repayment periods. This flexibility allows you to tailor your repayment schedules to align with what you can afford. Several factors can influence the terms of a loan, such as your creditworthiness and the total loan amount. A higher credit score or a larger loan often gives you more favorable terms or extended repayment periods. Different loan terms affect the overall cost you’ll pay over the life of the loan.

Secured vs. Unsecured Loans: What’s the Difference?

Home improvement loans can either be secured and unsecured. Secured loans require collateral as a form of security for the lender. In the case of home equity loans, this collateral is your home itself. As a result, this often means lower interest rates due to the reduced risk for the lender. Unsecured home improvement loans, such as personal loans, don’t require collateral, providing more borrowing flexibility and accessibility. This higher risk to the lender results in higher interest rates than secured loans.

Secured loans typically have longer repayment periods than unsecured loans due to these loans having collateral tied to them. With the property acting as security, lenders may feel more comfortable extending the repayment period. The extended terms give you more time to repay the loan, often resulting in lower monthly payments. However, longer terms can lead to higher overall interest costs over the life of the loan.

What Does the Application Process Involve?

Lenders require you to submit personal and financial information when applying for a home improvement loan. They’ll usually request specific documentation, such as proof of income, credit history reports, and any blueprints or contracts including outlining your renovation project details. Many lenders now offer the convenience of online applications to simplify the process. These online platforms allow you to complete applications from the comfort of your home.

The approval process for home improvement loans varies depending on the lender and the intricacies of the application process. Some lenders may approve the loan instantly or within a few days, while others may take longer, especially if they involve more extensive reviews or additional documentation. Some lenders offer preapproval opportunities for home improvement loans. This helps you to understand your available options and potential loan amounts before you start a project.

What Factors Influence the Interest Rates on Home Improvement Loans?

Your credit score, the loan amount, and the loan term can affect the interest rates you receive. A higher credit score often secures lower rates. These loans will also consider other financial indicators such as your debt-to-income (DTI) ratio and loan-to-value (LTV) ratio. Larger loans might gain more favorable rates, while extended repayment periods can sometimes result in higher overall rates due to interest accrual over a longer period. The strength and condition of the current market will also play a major role, so consider this as well when planning the timing of your renovation project. 

What Should I Consider When Choosing a Lender for a Home Improvement Loan?

When choosing a lender for a home improvement loan, shopping around is key. Compare interest rates, aiming for the lowest possible rates to minimize your borrowing costs. Evaluate the loan terms, considering the balance between shorter repayment periods with higher monthly payments and longer terms that may accrue more interest over time. Be aware of additional fees or charges, such as origination fees or prepayment penalties, that can increase the loan’s total cost. You can also work directly with a RenoFi Advisor who can essentially serve as a concierge, helping you learn about the best loans for financing your renovations and finding the best available lenders, so you don’t have to. 

Lender Options: Compare, Compare, Compare

You have a lot of choices when it comes to home improvement loan options. Traditional financial institutions, such as banks and credit unions, as well as online lenders and specialized platforms like RenoFi, each provide unique benefits. Some lenders specialize in home improvement loans, focusing their services specifically on financing renovation projects. We typically provide competitive rates and flexible terms. Online lenders offer a faster and more convenient application process, often resulting in quicker responses and access to funds. 

You should assess a variety of factors when choosing the right lender. Comparing interest rates, loan terms, and other important information, such as fees and eligibility criteria, is essential. Consider your specific situation and talk to your financial advisor to ensure you’re making the best decision for you. A RenoFi Advisor can also provide personalized support, guiding you through the application and funding processes. This can make the borrowing experience more enjoyable and convenient. We also work directly with credit unions that not only offer the lowest rates available, but also more flexibility in your terms.

Final Thoughts

A home improvement loan can provide the funds you need for a home renovation project without dipping into your savings. When choosing a loan, consider the interest rates, whether they’re fixed or variable, how long the repayment periods are, and the amount lenders offer you. Determine which terms and repayment structure makes the most sense for your financial situation and project goals. Take your time comparing your options to decide whether a secured or unsecured loan is right for you. For more information on how to boost your borrowing power to tackle everything on your wish list, contact one of our Renovation Advisors, or try out our home improvement loan calculator to see it for yourself.

Sources:

https://www.nerdwallet.com/article/loans/personal-loans/how-home-improvement-loans-work

https://money.com/what-are-home-improvement-loans/

https://www.rocketmortgage.com/learn/home-improvement-loans

https://money.com/what-are-home-improvement-loans

https://www.bankrate.com/loans/home-improvement/rates/  

https://www.rocketmortgage.com/learn/home-improvement-loans

https://www.renofi.com/learn/​what-is-a-home-renovation-​loan/

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By Nicolette Miller

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