The most money and lowest monthly payment for your renovation
Borrow up to 90% of your future home value with a RenoFi Renovation Loan
WHAT IS YOUR PROJECT?
There are several types of home improvement loans out there, each with its own benefits and downsides. And that’s why it’s important to understand all the different types of home improvement loans available to you.
What type of loan for home improvements is best for you? We’re going to break down each of your options to help you find out!
In this article, we’ll cover everything you need to know — from the types of loans for home renovation out there to eligibility requirements, payment terms, and more.
Types of Loans for Home Improvement
1. Personal Loans: Unsecured Financing
A personal loan is one of the types of loans for remodeling that can be used for various purposes — including home improvement projects. These unsecured loans typically have higher interest rates than secured loans, but they don’t require collateral.
Since these home renovation loans are unsecured, they have much higher interest rates than home equity loans (which are secured). We’re talking a rate of 8-15%. And this is because, without collateral, you pose a higher risk to your lender. They also have an origination fee of between 1-6%.
How Personal Loans Work: personal loans have shorter terms of 5-10 years, compared to home renovation loans which have a 20-30 year payback period, making your monthly payments very high.
You’ll also have less borrowing power than other home renovation loans, simply because the amount of a personal loan typically only goes from $25K to $35K. So if you’re looking to tackle a major project, you’ll likely have to find another way to cover the remaining cost.
Best For: While we don’t recommend personal loans as the route for most homeowners to take, personal loans may be a good option for individuals with the following:
- You have great credit.
- Your cash flow can cover your monthly payment.
- You have a robust home emergency fund.
- You don’t have equity in your home.
- You don’t want to use your home or car as collateral.
- You don’t need a large amount of funds
Benefits of a Personal Loan
Personal loans do offer some benefits for specific situations. Here are a few:
- You only need to borrow a small amount. If you’re paying most of your renovations with cash or aren’t tackling anything major, you won’t need to worry about the lower borrowing power or shorter payback period. Plus, you get all the money in a lump sum to start working on your project without limitations.
- You can secure your loan fast. Getting approved and getting the cash is quick and pretty simple to secure — even if your credit isn’t great. Since there are no inspections or appraisals and you don’t need to provide collateral, the application process is pretty easy.
- You’ll have fixed monthly payments. Personal loans typically come with a fixed APR (annual percentage rate) over a set number of years, so they are easier to plan and budget for.
2. Home Equity Loans: Leverage Your Home’s Value
A home equity loan is a fixed-rate loan secured by your home’s equity. You receive a lump sum upfront, and repayments are made over a fixed term.
How Home Equity Loans Work: Lenders assess the amount of equity you’ve built in your home in order to determine the lump sum of cash you’ll receive. To determine your equity, you need to calculate the difference between the current value of your home and the outstanding balance on your mortgage.
For example, if your home is currently valued at $600,000, and you still owe $400,000 on your mortgage, then you have $200,000 in equity. You will be able to borrow against the $200,000 you’ve built in equity.
The loan has a fixed interest rate, which is typically set lower than other types of loans (e.g., personal loans).In 2023, the average interest rate for a home improvement home equity loan is around 7 - 15%, according to Bankrate. In terms of repayment, you’ll have 5 to 20 years to pay off a home equity loan.
Best For: Home equity loans are best suited for homeowners with substantial equity who need a lump sum for larger, one-time projects and can manage fixed payments. If you haven’t built a considerable amount of home equity you should consider a RenoFi Home Equity Loan.
Benefits of a Home Equity Loan
- You have a fixed interest rate that comes with set terms, payments, and schedules.
- Rates are locked in, so even if the loan term is 30 years, it won’t change over time.
- Rates are typically lower than other credit products.
- The full amount of money is provided in one lump sum.
- You pay off the loan in fixed payments over the life of the loan.
- Could offer a way to convert the equity you’ve built up in your home into cash.
- You can pay off the loan early and refinance at a lower rate (if you go through the credit process again).
3. Home Equity Lines of Credit (HELOC): Flexible Borrowing
A HELOC (or home equity line of credit) A HELOC is a revolving line of credit based on your home’s equity. You can borrow as needed during the draw period. These loans have variable rates, meaning that your interest rates will change depending on market conditions as you pay back your loan.
Most HELOCs and Home Equity Loans do not give you credit for your home’s after-renovation value. But RenoFi HELOCs allow you to borrow up to 90% of the POST-renovation value of your home, which means you’ll be able to get the financing you need whether you’re doing a smaller project or tackling a large-scale renovation — all while enjoying the lowest rates available.
How HELOCs Work: HELOCs offer an available credit limit determined by your home’s value, the amount owed on the mortgage, and your lender’s specific criteria. The main factor that determines your maximum line of credit is your Combined Loan-To-Value (CLTV) Ratio. Each lender will offer a different, maximum CLTV, typically between 75% and 95%. A CLTV ratio is simply your mortgage, combined with your HELOC (second mortgage), divided by the value of your home.
HELOCs will have two phases: a draw phase and a repayment phase. In the draw phase, which is typically around 10 years, you are able to access your line of credit whenever you’d like. Once that phase ends, the repayment phase starts, when you’ll make monthly payments to cover the outstanding balance, including both principal and interest.
Best For: A Home Equity Line of Credit (HELOC) is best suited for homeowners who need ongoing access to funds for multiple projects over time and are comfortable with variable interest rates.
Benefits of a HELOC
The biggest advantage of using a home equity line of credit is the flexibility to access more funds during your renovation as you need it. You’ll also have a longer window to start repayment.
HELOCs are best for homeowners who need flexibility in accessing funds for their home improvement projects, especially if you’re not sure how much money you’ll end up needing. If your home improvement project will have fluctuating costs or you may need access to funds over an extended period of time, a HELOC can offer those benefits.
And if you know you won’t be able to begin paying back the fund immediately, a HELOC solves that issue as well.
Other homeowners with good credit scores and equity in their homes could benefit from using a HELOC because they may be able to secure a lower interest rate compared to other forms of credit, such as credit cards or personal loans.
Home Equity Loan vs HELOC
When comparing home equity loans vs. lines of credit(HELOCs), consider that home equity loans provide a lump sum with fixed rates, suitable for one-time expenses. HELOCs offer a revolving line of credit with variable rates, ideal for ongoing financial needs.
- Interest Rate Structures: Unlike the variable interest rates that HELOCs have, home equity loans have fixed interest rates, meaning that the rate of a HELOC can change over time based on the conditions of the market, while a home equity loan’s rates stay the same over the life of the loan.
- Repayment Terms: HELOCs usually have a draw period of 5-10 years, during which the borrower can access the available credit as needed and only make interest payments on the amount borrowed. After the draw period, there will be a repayment period where the borrower makes monthly payments on the outstanding balance. Reversely, home equity loans start repayments immediately in a fixed repayment period with equal monthly payments throughout the life of the loan.
- Credit Limits: HELOCs typically have a higher credit limit than home equity loans. And while tempting, this can result in higher debt and longer repayment periods.
- Debt Classification: A HELOC is considered a type of revolving debt, similar to a credit card, where borrowers have a credit limit based on the equity in their home, and interest is charged only on the amount borrowed. This is different from a home equity loan, which is a type of installment debt, similar to a traditional mortgage, meaning it provides borrowers with a lump sum upfront that they must repay over a set term with a fixed interest rate and monthly payments.
4. Cash-Out Refinance: Combine Financing and Mortgage
Cash-out refinances allow you to refinance your existing mortgage for a larger amount than you currently owe and receive the difference in cash. If you have a significant amount of equity in your home and want to take advantage of lower interest rates on your mortgage, this may be the best way to go.
How Cash-Out Refinancing Works: In order to use a cash-out refinance, you must have sufficient equity built up in your property (typically around at least 20%), and you’ll be able to borrow up to a maximum of 80% of your home’s value. So to calculate how much you could take out with a cash-out refinance, you multiply your home’s current value by 80%, and then subtract your outstanding loan balance from that amount.
For example, if your home is currently worth $500k and your mortgage balance is $375k, you could refinance and take out a cash amount of $25k, then use this to pay for home improvements.
But if you went with a RenoFi Cash-out Refi, you’d multiply your home’s appraised future value instead, boosting your borrowing power significantly.
Similar to that of a primary mortgage, you’ll also need to pay closing costs, such as an appraisal fee, which typically ranges between 2-5% of the loan amount. Unless you finance these costs with the new loan, subtract these from the final amount of cash you end up with.
Your new mortgage’s balance will be higher than your original one, combining the existing balance with the additional amount that you’re borrowing and closing costs.
Best For: Cash-out refinancing is best suited for homeowners who have substantial equity in their homes and need cash.
Benefits of a Cash-Out Refi Cash-out
Refinances typically have lower home improvement loan rates compared to other unsecured loans (unless you go with a RenoFi loan).
- Lower your interest rate: The most common case for cash-out refi is when it makes sense for the buyer to refinance as well. If you are looking to obtain a lower rate, this loan allows you to kill two birds with one stone as you obviously want the lowest rate possible on a larger loan.
- Lower your cost to borrow: These loans are often less expensive options since mortgage refinance rates are almost always lower than personal loans (like home improvement loans) and credit cards.
- Improve your credit: If you use the funds from your cash-out refi to pay off debt, you could boost your credit score if your credit utilization (how much you’re borrowing compared to how much is available to you) ratio drops.
- Take advantage of tax deductions: When you’re using these loans for home improvements, there may be tax advantages if your project meets IRS eligibility requirements..
5. FHA 203(k) Loans: Bundle Purchase and Renovation
FHA 203K loans is a government back loan that combines home purchase and renovation costs into one mortgage. FHA loans are insured by the Federal Housing Administration, a government-sponsored agency, and allow borrowers to finance the purchase or refinance and renovation of a home with a single mortgage. These mortgage loans also have lower down payment and credit requirements, making them accessible to more homeowners. There are two types of FHA rehab loans: the standard 203 (k) loan and the limited 203 (k) loan. The standard 203 (k) loan allows for large-scale and structural work, while the limited 203 (k) loan only covers non-structural repairs. There is also a special 203 (h) loan for victims of natural disasters who want to buy or rebuild a home in a declared disaster area. The 203 (h) loan can be used with or without the 203 (k) loan.
How FHA 203K Loans Work: The downside of these loans is that you’re required to pay an upfront mortgage insurance premium, typically equal to 1.75% of your total loan value, and then monthly mortgage insurance payments moving forward.
And since FHA loans are mortgage loans, you will have to refinance which could cost your current lower rate. You also have to pay typical closing costs, as well as extra costs associated with the construction loan, making it one of the most expensive loans on the market from a fee perspective.
Even further, many contractors simply refuse to take on projects that are using these types of loans because of the headaches involved with the inspections and disbursement schedule.
Best For: Borrowers who may have a hard time with a down payment and plan to purchase a home that needs renovations.
Benefits of FHA 203K Loans
- High Borrowing Power. Ability to borrow up to 96.5% of the future value of your home. As a point of comparison, private banks often limit renovation loans to 80%, and even though some may allow you to go to 85% or 90% loan to value, we’ve never seen any that allow up to 96.5%.
- Single Closing. Single close means you only sign one set of documents and pay one set of closing costs.
- Looser Eligibility Terms. The standards for a borrower are lenient. For homeowners who don’t have great credit scores, this is your best option.
- Flexible Payment Terms. Ability to spread payment over 30 years.
6. VA Renovation Loan: Government Loans for Veterans
A VA Renovation Loan, also known as a VA Rehab Loan or VA Renovation Refinance, is a specialized mortgage option offered by the U.S. Department of Veterans Affairs (VA). This loan program allows eligible veterans, service members, and certain qualified individuals to combine the purchase or refinancing of a home with the costs of renovation or repairs, all in a single loan.
How VA Renovation Loans Work: Also known as VA Rehab Loans, these are designed for eligible veterans, active-duty military, National Guard personnel, reservists, and qualifying surviving spouses. They offer all the same benefits of standard VA loan products — such as very low qualifying credit scores and no down payment — while also allowing borrowers to roll in the cost of certain home repairs and improvements in their loan amount. In other words, they make it possible for borrowers to purchase a home requiring significant upgrades or repairs without taking out a separate loan and a separate monthly payment.
Best For: VA loans are particularly well-suited for military service members, veterans, and their eligible spouses.
Benefits of a VA Renovation Loan:
- High Borrowing Power. Unlike traditional mortgages, VA renovation loans are based on the value of the home being purchased after the remodel or repairs are complete (like RenoFi Loans). And buyers are able to borrow 100% of the as-completed value.
- More Home Options. These loans give buyers more options in the neighborhoods they want to be in when move-in-ready inventory may be low or out of budget.
- More Affordable. Since these renovation loans are under the VA umbrella, there are additional benefits that many other loans for home improvements don’t offer, such as low interest, 0% down, and no mortgage insurance.
Comparing Home Improvement Loans (Side-by-Side)
If you still need help deciding what type of loan for home improvement is right for you, here’s a side-by-side comparison of home improvement loan rates, loan limits, loan terms, and more:
|Loan Type||Pros||Cons||Best Suited For|
|Home Equity Loan||Fixed interest rate, lump sum disbursement.||Requires home equity, higher interest rates.||Homeowners with significant equity.|
|HELOC||Flexible access to funds, variable interest rate.||Variable rates, potential for overspending.||Homeowners needing ongoing funds.|
|Personal Loan||Quick approval, no collateral required.||Higher interest rates, lower loan limits.||Homeowners needing smaller amounts.|
|VA Loan||No down payment, competitive rates.||Limited eligibility, VA funding fee.||Veterans and eligible military members.|
|FHA 203(k) Loan||Finances home purchase and renovation costs.||Strict requirements, FHA mortgage insurance.||Homebuyers looking to renovate.|
|Cashout Refinancing||Consolidates debt, potentially lower rates.||Requires equity, new mortgage terms.||Homeowners with equity-seeking cash.|
Try our loan calculator to see how much you could borrow, schedule a call or chat online with one of our team who are on hand to help you to understand your options and answer any questions that you might have to determine what type of loan for home improvements is right for you.
How to Get a Home Improvement Loan
Home improvement loans are a great way to finance your home renovation project, and with several types of loans available — from personal loans to home equity loans, HELOCs, and construction loans — you have options to choose from. To get the best deal on a home improvement loan, shop around for lenders and compare interest rates and fees. And remember to check your credit score and eligibility requirements before applying.
RenoFi can help you learn more about your loan options and find the best lenders available to get you started. Our loans increase your borrowing power based on the after-renovation value of your home while offering lower interest rates and monthly payments than all the other options out there thanks to our awesome partnerships with credit unions.
To get a home improvement loan, follow these steps:
- Determine how much you need to borrow for your project.
- Check your credit score and make sure it meets the lender’s requirements.
- Shop around for lenders and compare interest rates and fees.
- Gather the necessary documentation, such as proof of income and ownership of the property.
- Apply for the loan and wait for approval.
- Once approved, use the funds to finance your home improvement project.
Expert Tips To Get the Most Out of Home Improvement Loans
- Set a Realistic Budget
- Choose Projects That Add Value
- Get Multiple Bids From Contractors
- Stay Involved in the Process
- Make Payments on Time
Why Take Out A Home Improvement Loan?
The right type of home improvement loan can make it possible for you to tackle your entire renovation wishlist today, rather than having to wait 10+ years to build up sufficient equity to borrow based upon this.
Just think about it this way.
You’ve recently bought a new house but have a list of renovations you want to undertake to make it your forever home; the perfect space for you and your family.
This makes total sense. After all, if you’re buying a house in 2021, there’s every chance that the property is at least 40 years old and has elements that you want to change or update.
But renovations are expensive, especially when you want to remodel the whole house in one go.
You have three options:
- You reduce the scope of your project and renovate room-by-room, and project-by-project, over many years, living in a never-ending construction zone in the process (however, doing so increases the cost of renovating as contractors give better rates on larger projects).
- You wait until you have built up sufficient equity and make do with your house in its current form, knowing that this will likely take 10 years or more. All while your children quickly grow up around you.
- You take out a renovation loan today and have access to a loan amount that lets you tackle everything on your wishlist right now, enjoy your perfect home with your family, and make affordable monthly repayments.
You only raise your family once, and a home improvement loan could help you to do so in a home that best suits your needs
- Construction Loans
- Home Equity
- Home Improvement Loans
- Renovation Loans
- FHA 203k + Fannie Mae Homestyle
- Loan Basics
The most money and lowest monthly payment for your renovation
Borrow up to 90% of your future home value with a RenoFi Renovation Loan
WHAT IS YOUR PROJECT?