How a home improvement loan calculator works

If you’re considering making home improvements, one of the first things you’ll think about is how much everything costs. While some costs are quite obvious, others can be surprising to a lot of homeowners. From building permits, to professional labor and cleaning, to new materials, finishes and furnishings, the list of expenses continues.

Because of these costs, especially the unexpected ones, many homeowners choose to take out a home remodel loan. No one wants to get halfway through a renovation with no budget left, scrambling to find some sort of 0% interest credit card or busting into the 401k retirement fund to finish the project.

Rather than risk that stress, you can create a comfortable budget and tackle your entire renovation wishlist with the help of a loan.

It’s important to have a plan in place when financing your home improvements, and that’s where our RenoFi Loan Calculator can help.

The RenoFi Loan Calculator will estimate potential interest rate, maximum borrowing power, and monthly payments for a RenoFi Renovation Home Equity Loan from one of RenoFi’s credit union lending partners.

In this guide, we’ll explain how the calculator works.

Get Monthly Loan Payment Estimates

Before applying for a loan to fund your home improvements, you’ll probably want to know the total cost in real terms. 

How much will you have to pay every month? What are the terms? How much will you pay in interest? All these factors will help you decide if a loan is the right choice for you. 

You can see how long it will take you to pay off a home improvement loan based on monthly payments or by the loan term. RenoFi Loans generally have 20 year terms, and RenoFi HELOCs have a 10 year interest-only period followed by a 20 year amortization period. 

Other types of home improvement loans vary - from one year to 30 years terms. 

You can either choose a loan with a shorter term to get the loan paid off ASAP, which means your payments will be a lot higher, or you can pick a loan with a longer term to get to a monthly payment amount that fits your budget. 

To get a better sense of your payment estimate, the RenoFi Loan Calculator will show you:

• Loan amount
• Loan APR (the approximate interest rate you will pay)
• Loan term OR Monthly payment amount

You’ll need to enter these values into the calculator:

• Home ARV (after renovation value)
• Home current value
• Credit score (not a hard credit check, self-reported)
• Zip code

Once you enter these values, you can run various scenarios to come up with a loan amount, rate, term, and monthly payment that will work for you. And when you do find something that works, you can then begin your search for a home improvement loan lender. 

Home Improvement Loan Calculator Example

Get a Home Improvement Loan

If you enter your information into the calculator and realize that a home improvement loan might work for you, it’s time to get started! 

So we’ll explain what you need to know about home improvement loans: where to get them, how much you can borrow, and how to get pre-qualified. 

But first, it’s important to note that home improvement loans are generally unsecured personal loans branded for renovation projects. 

To learn more, check out the RenoFi guide to home improvement loans.

Where to Get a Loan

Many homeowners start their search for home improvement loans with an online lending marketplace. These marketplaces partner with lenders near you so you can compare a variety of home improvement loan options on one site. 

Each and every lender will offer slightly different loan options - including loans with different interest rates, terms, fees or maximum borrowing amount. 

Lending marketplaces can help you decide which lender and loan type is right for you. Once you compare lenders, you can visit specific lenders’ websites and apply.* 

Some of the most popular online lending marketplaces are:

• Fiona
• Lending Tree
• Credible

How Much Can I Borrow?

Your maximum loan amount will vary depending on a variety of factors: loan type, lender, current home value, mortgage balance, credit score range and location. 

In general, with home improvement loans (unsecured personal loans), you’ll be able to borrow anywhere from $500 to $100,000. 

However, not all borrowers can reach that upper borrowing limit, which is reserved for borrowers with the best credit and income level. Borrowers with lower credit scores, income levels, and debt-to-income ratios may be capped at borrowing levels closer to $25,000. 

The best way to find out how much you can borrow is to visit a lending marketplace or check out a loan calculator like the RenoFi Loan Calculator and get an estimate. 

Getting Pre-Qualified

Before you get officially qualified for a home improvement loan, your lender can pre-qualify you based on your financial information. 

Getting pre-qualified can give you peace of mind that loan options will work for you before you actually close on your loan. 

To get pre-qualified, you’ll need to share important financial information with your lender so they can determine your risk of defaulting on a loan, ie. the chances that you’ll be able to pay it back. 

Here’s the information that you should collect before getting pre-qualified:

• Yearly income
• Employment verification
• Savings account
• Desired loan amount
• Repayment term
• Rent/Mortgage/Other monthly debt
• Soft and hard credit check

Your credit score is the most important factor that home improvement loan lenders look at. If you have a strong credit history, pay your bills on time and pay your credit card balances each month, your credit score shouldn’t impede your ability to pre-qualify for the loan you want.

Other Loan Considerations

Before applying for a home improvement loan, there are several factors to consider to determine whether it’s the right choice for you. 

1. Your budget: There might be a difference between your maximum loan amount according to your lender, how much you can actually afford to pay back, and what you need to borrow to complete your renovation wishlist. Make sure to figure out exactly how much you’ll need to finish your home improvement project (including a buffer), as well as how much money you can afford to pay toward your loan each month based on your income and other expenses.
2. Loan repayment term: Every loan option will have a different repayment term, from one year to 30 years. There are pros and cons to short vs long repayment terms, and you’ll need to decide what works for you. Obviously, the longer your loan repayment period is, the more interest you’ll have to pay, but your monthly payments will be lower overall. 
3. Interest rate: Most homeowners will look for the loan option with the lowest interest rate. It’s important to compare interest rates with context, though. The total amount of interest you’ll pay depends on the loan repayment term as well. 
4. Fees and penalties: It’s also important to note any and all fees or pre-payment penalties that accompany your loan. Even if you have a really low interest rate, if the fees are high, it might make more sense to pick a loan with a higher interest rate and lower fees. 
5. Total loan cost: At the end of the day, you shouldn’t look at any of these costs independently. For each loan option you evaluate, you should add up the monthly payments, interest rates, and any added fees and costs to properly analyze your options.

Best Ways to Finance Home Improvements

Home improvement loans are generally unsecured personal loans used to finance renovations or home improvement projects. But there are several other options available to fund home improvement projects, including RenoFi Loans. 

Here, we’ll take you through some of the most popular ways to finance home improvement projects:

RenoFi Loans

RenoFi Loans, quite simply, are the perfect way for most homeowners to borrow the money they need to tackle their whole renovation wishlist in one go. 

RenoFi Loans are a unique type of loan that are structured like home equity loans and are second position mortgage products, but have the borrowing power of renovation loans like construction loans, FHA 203ks, and Fannie Mae Homstyle renovation loans. 

RenoFi Loans let you borrow based on your home’s after renovation value without the need to refinance your first mortgage.  

In fact, this type of loan can increase your borrowing power by more than 11x.

Pros:

• Does NOT require you to refinance your first mortgage, meaning you can keep your low rates and avoid restarting the clock on your mortgage.
• For 10 to 20-year terms, rates are typically the same as a traditional home equity loan or lines of credit.
• Because the loan doesn’t require you to refinance your mortgage, thus you’ll likely pay much less in closing costs.
• You can borrow $20k to $500k
• The only renovation loan that doesn’t require you to refinance and it’s the only one that doesn’t require funds to be disbursed to the contractor through a messy inspection & draw schedule process.

Cons:

• Because home equity loans typically max out at 20-year terms, the monthly payments for these loans are often a bit higher than repayments on loans with a term of over 30 years.

Home Improvement Loans

Also known as personal loans, they offer limited borrowing power, high-interest rates, and short repayment periods, yet can be an effective way to quickly borrow a smaller amount of money, let’s say to carry out home repairs rather than a full remodel. 

You see, many lenders market personal loans as a home improvement loan, and many homeowners simply don’t realize that they have alternatives when they have no equity available to borrow against.

The same applies to borrowing using credit cards.

Pros:

• When you only need to borrow a small amount of money (let’s say, less than $20k), a personal loan might be your best option without tapping into equity.
• Personal loans let you get access to the money immediately and typically have a quick and simple application process.

Cons:

• The interest rate on personal loans is usually much higher than on other types of financing, often somewhere between 8% and 15%.
• Many personal loans come with origination fees of between 1% and 6%, adding further costs.
• The payback period on a personal loan will usually be somewhere between five and 10 years, whereas home renovation loans allow repayments to be made over 20 to 30 years.
• You will have much less borrowing power than with other types of financing. And while it may appear that there are personal loans that will let you borrow up to $100k, the reality is that very few borrowers will actually qualify for a loan amount this high.

0% Introductory APR Credit Cards

Similar to personal loans, credit cards are a great option for homeowners looking to do smaller projects, pay back loans quickly, and use financing outside of home loans that are based on your credit score rather than your home equity. 

0% introductory APR credit cards are useful because initially, you don’t need to pay any interest on the debt you owe. However, keep in mind that this 0% rate is “introductory,” not permanent. Some credit card companies will offer this 0% rate for six months, and others for 24 months, or somewhere in between.  

You’ll need to look into the terms and conditions of the credit card to figure out exactly when a higher interest rate will kick in, and figure out whether or not you’ll be able to pay off your credit card debt fully before that happens. 

Pros

• Quick application turnaround compared to home loan options if you need money at the last minute.
• These loans are based on your credit score, not your home equity. If you aren’t able to pay your balance each month, your home won’t be on the line. 

Cons

• These cards have high interest rates if you aren’t able to pay your balance during the introductory rate period. 
• You’ll have much less borrowing power with credit cards compared to home loans. While credit cards with no introductory APRs can have borrowing limits up to $500,000, most 0% intro rate credit cards have borrowing limits closer to $15,000.

Traditional Renovation Loans

In the past, the most common solution for homebuyers looking to finance both the purchase and renovation of a new fixer-upper home in one have been renovation loans, though they can also be used for existing homeowners. 

And like RenoFi Loans (a new type of renovation loan), these both allow you to borrow based on your home’s after renovation value.

But many mortgage bankers now avoid suggesting traditional renovation loans (not RenoFi Loans) to their clients, and realtors are steering both their buyers and sellers away from these options completely.

Pros:

• You only need one loan that covers both the purchase and renovations of your new home.
• These require a low minimum down payment (as low as 3.5% with 203k loans and 3% with Homestyle loans).
• You can get approved for these loans if you have a less-than-perfect credit score.

Cons:

• Many contractors simply refuse to take on projects that are using these loans due to the headaches involved with the inspections and disbursement schedule.
• Homebuyers who are using traditional renovation loans are at a huge disadvantage when putting in an offer on a home, especially in a competitive market, because they require extra steps when compared to paying cash or using a traditional mortgage.
• When you’re up against someone who can move quickly to finalize the deal while you’d drag out the sale bogged down by the traditional renovation loan process, odds are that seller won’t be choosing you.

Home Equity Loans and Home Equity Lines of Credit (HELOCs)

For homeowners who have tappable equity available, a traditional home equity loan (also known as a second mortgage) or line of credit (HELOC) can be used to pay for home improvement work.

A home equity loan allows you to borrow a fixed amount of money by tapping into your home’s equity, whereas a HELOC gives you access to a revolving line of credit.

And, according to the US Census Bureau’s Housing Survey, approximately 50% of home equity loans are used for the purpose of home renovations. 

But the problem here is that it takes a long time to build up sufficient equity, and it can often take more than ten years to be able to draw on this to finance the projects you want to do.

This makes this type of financing unsuitable for people who have only recently bought their home or whose renovation work will cost more than the loan amount available.

Pros:

• A lower, fixed interest rate than personal loans and credit cards.
• The interest paid on a home improvement loan or HELOC is tax-deductible.
• Funds are available as an upfront lump-sum payment with an equity loan and can be drawn down as and when needed from a home equity line of credit, and not all of the money needs to be spent on home improvements.

Cons:

• Equity must be available to take out a home equity loan or HELOC, and not having sufficient equity can significantly reduce your borrowing power. Homeowners get no credit for the home value increase that will result from the renovation.
• Terms typically max out at 20 years unlike a first mortgage which can go to 30 year. Shorter term results in a higher monthly payment.
• The interest rate payable on a home equity line of credit will typically be variable, meaning that your monthly repayments can change.

Mortgage Refinance

A cash-out refinance can allow you to combine refinancing your first mortgage AND let you secure the cash you need to tackle your major renovation project by tapping into the equity that you’ve built up.

But as with home equity loans and lines of credit, you will need sufficient equity for this to be a viable option.

And even in cases where you have built up equity, lenders typically cap what you can borrow with a cash-out refi at 80% of your current home value, significantly reducing your borrowing power compared to other options.

Our general opinion is that most homeowners shouldn’t use a cash-out refinance for renovations.

Pros:

• This option allows you to consolidate the finance needed for remodeling and your current mortgage into a single loan, meaning a single monthly mortgage payment.
• A cash-out refi, like your first mortgage, will let you make repayments over a term of up to 30 years. For someone who purchased their home in their early 2000s and locked in at a much higher interest rate, this could be a good move.

Cons:

• Homeowners get no credit for the home value increase that will result from the renovation, the loan is based on the CURRENT home value and thus you must have significant equity available in your home to take cash out.
• You will have a much lower borrowing power than other types of home improvement finance, given that most cash-out refinances only let you tap up to 80% of your home’s current value.
• They come with higher closing costs than the alternatives.
• Homeowners typically pay a higher rate when taking cash-out vs. a non cash-out refinance.