What is a home improvement loan?
A renovation loan is a unsecured personal loan that you use to cover the costs of home upgrades or patches. Lenders offer these loans up to $ 100,000. A home improvement loan comes in the form of a lump sum amount all at once, and you pay it back in monthly installments, usually from one to 12 years.
Because you are not using your home as collateral for the loan, your interest rate is based on information such as your credit and income. If you can’t pay off a home improvement loan, your credit will take a hit.
Advantages and disadvantages of mortgage
If you don’t have enough equity in your home to cover the project, or if you don’t want to use your home as collateral, a home improvement loan may be a good idea.
These loans can run into the tens of thousands of dollars, making them ideal for large projects, while a credit card can be ideal for small DIY projects.
Here is what you need to know about home improvement loans:
They can have high rates. Since the loan is unsecured, the interest rate may be higher than on a home equity loan or home equity line of credit, which typically have single digit rates.
Usually you make fixed payments. Personal loans have fixed monthly payments, so you can budget for them reliably.
Funding is quick. Online applications usually take a few minutes, and funds are available within a day or two from some lenders, while funds for a HELOC loan or home equity loan can take a few weeks.
You do not benefit from tax advantages. You cannot claim a tax deduction on interest on personal loans like you could with mortgage interest.
How To Compare Home Improvement Loans
Shopping and prequalification can help you find the loan with the best rate and the best features. These are some important features to compare between home improvement loans.
Annual rates as a percentage: APRs represent the total cost of the loan, including any fees the lender may charge. If you are a member of a checkout, this might be the best place to start. The maximum APR in federal credit unions is 18%.
Amount of the loan: Some lenders cap the amounts at $ 35,000 or $ 40,000. If you think your project will cost more than that, look for a lender who offers higher loan amounts.
Term of the loan: A loan with a long repayment term may have low monthly payments, but you will pay more interest over the term of that loan than a loan with a shorter repayment term. You can use a mortgage calculator to see the estimated payments on loans with different terms.
Possibility of adding a co-signer or co-borrower: Some lenders will allow you to add a co-signer or co-borrower to your loan application. Adding someone with better credit or higher income to the loan application can help lower your APR or increase the amount you can borrow.
How to get a renovation loan
To get a home improvement loan, start by comparing lenders’ offers with other options, check your rate and monthly payments, prepare the documents, and finally apply.
Let’s break down these steps:
Compare the options. Compare the best home improvement lenders with each other and with other financing options, like credit cards and home equity financing. You’re looking for the one that costs the least in total interest, has affordable monthly payments, and fits your schedule.
Check your rate and your monthly payments. Try to define the estimated cost of your project at this stage. Many online lenders and some banks allow borrowers to pre-qualify to see potential personal loan offers before applying, but you will be asked how much you would like to borrow. The process involves a soft credit draw. You can compare the rates and monthly payments of several lenders online at once by pre-qualifying on NerdWallet.
Prepare documents. Once you have chosen a lender, gather the documents you will need to apply. This can include things like W-2s, pay stubs, proof of address, and financial information.
To apply. You may need to apply in person at small banks and credit unions, but larger and online lenders usually have online applications. Many lenders can give you a decision within a day or two of applying. After that, expect to see the funds in your bank account between one and seven business days later.
Renovation loan rate
Current rates for home improvement loans are between 5.99% and 35.99%. Lenders decide your rate on a home improvement loan primarily using your credit score, credit history and debt to income ratio.
Here’s what personal loan rates look like on average:
28.7% (lower scores are unlikely to qualify).
Source: Average rates are based on aggregated and anonymized offer data from users who prequalified in the NerdWallet lender market between January 1, 2020 and December 31, 2020. Rates are estimates only. and are not specific to any lender.
How to use a home improvement loan
Unsecured loans can cover almost any purchase. The amount you need will vary depending on your location, the size of your home, and the scope of your plans.
Americans spent an average of $ 18,216 on room additions and renovations in 2019, according to the most recent data available from the American Census Bureau’s American Housing Survey.
Here are some common projects and how much you could pay for each, based on the most recent cost estimates available.
Sources: U.S. Census Bureau U.S. Housing Survey 2019, Remodeling Magazine 2021 Cost vs Value Report, HomeAdvisor, Center for Sustainable Energy.
Other types of home renovation financing
You have a long list of options to finance your project, including a home equity loan or line of credit, cash refinance, or an unsecured home improvement loan to pay for your home improvement project.
Some government programs can help pay for a home renovation. The Federal Housing Administration has two programs: Title I loans and Energy efficient mortgages. You can search for a “Title I Property Improvement” lender in your state on the HUD website.
When it’s better: Consider applying if your project and finances meet the criteria stated by these programs. They can help make upgrades more affordable.
Home equity loans and HELOC
HELOCs have variable rates and allow you to borrow as you go and only pay back what you borrow. A home equity loan, on the other hand, has a fixed rate and is paid to you in a lump sum that you pay back over time.
Both options typically have lower monthly payments than personal loans, with repayment terms of up to 20 years. These home equity options use your home as collateral, which means you could lose your home if you don’t pay it back.
When it’s better: If you have equity in your home, you want a low rate and a longer repayment period, and you don’t mind putting your home as collateral.
When it’s better: Consider this option if current mortgage rates are lower than what you are currently paying.
You can strategically use a credit card to cover the cost of your upgrades. Reward cards can allow you to pay as you upgrade, while a card with a 0% introductory APR can cover short-term home renovations.
When it’s better: Use a credit card for projects that are small enough not to maximize them. You should generally aim to pay off your full balance each month. You will need a good or excellent credit (690 or higher) to qualify for an interest-free or rewards card.