What Are the Best Home Improvement Loans?

If this sounds similar to your situation, let’s discuss your home improvement loan options and everything you need to know before applying for one. 

What Is a Home Improvement Loan?

A home improvement loan can be harder to define than other lending options because it occupies a unique space somewhere between a mortgage loan and personal loan. That’s because you can get this loan without touching your existing mortgage.

Each home improvement loan comes with its own terms, fees, interest rates, and other costs that ultimately impact the total cost you’ll pay over the life of the loan. That’s why taking time to understand this unique financing option is key to being able to choose the best home improvement loan for you when you’re ready to start the renovation process.

Top Home Improvement Loans

There are many options when it comes to home improvement loans. While most home improvement loans are secured products, like a HELOC loan or Home Equity Loan, smaller projects can also be funded via an unsecured personal loan. Regardless of the specific loan product chosen, unsecured home improvement loans can provide the necessary funding for homeowners to make the projects they’ve been dreaming of into a reality.

Renovation Home Equity Loan

This is a type of home equity loan that allows homeowners to borrow money based on the equity they have in their homes. Renovation home equity loans are usually used for bigger projects, such as room additions, kitchen or bathroom upgrades, or other major home renovations. Interest rates for renovation home equity loans are generally lower than those for unsecured loans, but the interest is tax-deductible only if the money is used to improve your home.

Home Equity Line of Credit (HELOC)

A home equity line of credit, commonly referred to as a HELOC, is a type of financing that allows you to repeatedly borrow against the equity in your home. A lender establishes a maximum amount of money you can borrow based on the value of your home and your creditworthiness. HELOCs are often appealing for their flexibility, since you can borrow as much as you need up to your approved amount and only pay interest on that amount. This means that you could potentially avoid borrowing more than you need if your home improvement project costs less than expected.

Single-Close Construction To Permanent Loan (CTP)

This type of loan allows you to borrow money to finance both the construction of a new home and its permanent financing. It is a popular option for homeowners who want to build their dream homes from scratch or complete major renovations. The interest rates are often lower than those for a traditional mortgage loan, and you only make one set of payments during the construction process.

Two-Close Construction To Permanent Loan (CTP)

This type of loan is similar to the single-close CTP loan but involves two separate loans — one to finance the construction and another to provide permanent financing. This option may be more suitable for homeowners who want more flexibility and control over their financing options.

Fannie Mae HomeStyle Loan

The HomeStyle loan is a government-backed home improvement loan that can be used to purchase or refinance a home and finance its repair or renovation costs. It can be used for a wide range of projects, including structural or cosmetic repairs, energy-efficient upgrades, and accessibility improvements. Interest rates for HomeStyle loans are typically lower than those for unsecured loans, but the lending requirements are stricter.

FHA 203k (Full)

This loan program is operated by the Federal Housing Administration (FHA) and is designed to help homeowners finance both the purchase and renovation of their homes. The full 203k loan is for projects that require structural changes or repairs and can be used for projects up to the FHA maximum loan limit in your area. 

How to Compare and Find the Best Home Improvement Loans

When comparing home improvement loan options, there are several important factors to consider: interest rates, loan terms, loan amounts, and more. Here’s a breakdown of how you can compare these aspects across different loan options:

Interest Rates

Interest rates play a significant role in determining the overall cost of your loan. Home improvement loan rates can be anywhere from 6% to 35.99%. Some loans offer market rates, while others may charge above market rates. For instance, the Renovation Home Equity Loan and VA Renovation Loan offer market rates, which could make them more affordable options. However, other loans like the Fannie Mae HomeStyle Loan and FHA 203k (Full) charge above market rates, which could increase your total repayment amount. Interest rates may also vary from lender to lender, including whether they are fixed or variable — meaning if your monthly payments are the same or fluctuate based on market conditions. 

Loan Terms

The loan term is the period over which you’ll repay the loan. A longer term can result in lower monthly payments, but you’ll end up paying more in interest over time. Most of the loans listed, such as the Single-Close Construction To Permanent Loan (CTP), have a term of 30 years. The Renovation Home Equity Loan, however, has a shorter term of 20 years, which could lead to higher monthly payments but less interest paid over time.

Loan Amounts

Loan amounts can vary significantly, but most will range between $100,000 - $200,000. For big projects, loans that allow much larger amounts, like the Single-Close Construction To Permanent Loan (CTP) and the Two-Close Construction To Permanent Loan (CTP), might be suitable. The maximum loan amount you can qualify for depends on factors like your creditworthiness, incomes, and value of your home. Some lenders will also have minimum loan amounts, so keep that in mind as well. It is important to note that while most lenders only allow you to borrow up to 80% of your home equity, RenoFi Loans factor in the amount your home will be after the renovation, making it possible for homeowners to borrow up to 90% of their home’s future value. 

Other Factors

Certain loans may come with additional stipulations. For example, some loans require refinancing, such as the FHA 203k (Full) and VA Renovation Loan, while others, like the Renovation Home Equity Loan, don’t require refinancing. If you’re planning to build a new home, the Single-Close Construction To Permanent Loan (CTP) and Two-Close Construction To Permanent Loan (CTP) allow for new construction, while others do not. 

What is the Best Home Improvement Loan?

Borrowers who make improvements on homes with the intention of flipping for a profit tend to focus on short-term loans that allow them to avoid carrying debt on their investment. They also get to keep more of the profit because it’s not being eaten up by interest payments.

Homeowners who are improving a primary residence they intend to stay in for a while often feel more comfortable with a longer loan. However, these are just generalizations. Every borrower needs to do a comparison considering their own unique financial situation, specific project goals, and the current market.

Home Improvement Loans FAQs

How do interest rates vary among lenders for home improvement loans?

The Federal Reserve determines raises and lowers short-term interest rates in response to broad movements in the economy. That said, while Federal Reserve and mortgage rates typically move in the same direction, rates still vary by lender, based on several lender-specific variables. 

First, lenders with low overhead may offer borrowers advantageous rates compared to lenders with high overhead costs. This is one reason why borrowers are increasingly turning to online lenders instead of institutions that operate brick-and-mortar locations. Lenders will also take into consideration your creditworthiness, income, and loan amount to determine interest rates, while various loans offer different structures like fixed or variable interest rates, which impact your monthly payments as well. The lowest rates go to borrowers who have credit scores of 740 or higher and those with a score under 620 can expect the highest rates and fewer available options.

What factors influence the maximum loan amounts for home improvement loans?

When determining the maximum amount to give out for a home improvement loan, lenders generally use a formula that looks at the borrower’s finances, a home’s current value, and any equity that’s in a home.

How does the loan term affect the overall cost of the loan?

Longer loans are generally more expensive than shorter loans overall because you’re paying more accrued interest over the loan’s lifetime.

What are some common fees associated with home improvement loans?

The origination fee is one of the most common fees associated with applying for a loan. Once a loan is active, late fees, early repayment fees, and processing fees often apply.

What should you consider while choosing a loan provider?

Look closely at interest rates and fees because they determine how much you’ll pay for your loan. Additionally, consider a lender’s minimum and maximum loan amounts, professional reputation, approach to customer service, and convenience features for borrowers are other factors to consider to help identify the best home improvement loans out there.

Why RenoFi is the Best for Home Improvement Loans

RenoFi Loans stand out the ideal home improvement loans for many homeowners due to their unique and beneficial features:

Boosted Borrowing Power: RenoFi Loans calculate the loan amount based on the estimated post-renovation value of your home — not its current value. This approach can increase a homeowner’s borrowing power by more than 11 times on average, providing more funds for substantial improvements.

Lowest Rates: Once the renovation is complete, RenoFi Loans offer rates on par with traditional home equity loans, HELOCs, or cash-out refinances. These rates are typically lower than those of personal loans or credit cards, making RenoFi Loans a cost-effective solution for financing renovations.

Lower Fees: Compared to first mortgages, RenoFi Home Equity Loans come with significantly lower fees. RenoFi’s partnership with credit unions allows them to provide some of the lowest fees in the industry, further reducing the cost of your loan.

No Disbursement Schedule: Unlike many renovation loans, RenoFi Loans don’t require a complicated disbursement schedule for paying contractors. This feature simplifies the loan process and makes it easier for contractors to manage projects, eliminating the hassles associated with construction loans.

Suitable for Projects of All Sizes: Whether you’re finishing a basement or remodeling your entire home, RenoFi Home Equity Loans can accommodate a wide range of project sizes. With loan amounts ranging from $20,000 to $500,000 or more, these loans offer the flexibility to finance various types of renovations.

RenoFi Loans provide homeowners with enhanced borrowing power, competitive interest rates, lower fees, a streamlined disbursement process, and versatile project suitability, making them an excellent choice for financing home improvement projects.

RenoFi Loan Comparison Chart for New Homeowners