Whether you’re looking to buy, sell, or stay in your home, you may be considering a home improvement project. And while renovations can help increase the equity of your home, and add a personal touch, they can be costly.
Home equity loans and home equity lines of credit (HELOC) may tap into your home’s equity to fund improvement projects. And not all improvements will create the highest possible return on investment.
Personal loans offer a possible alternative to home equity financing. Home improvement loans can make it easy to increase your home’s value without tapping into equity.
Home improvement loans are useful for financing:
- Kitchen remodels
- Bathroom remodels
- New deck/patio/porch
- New exteriors
- Green homes
- Home repairs
It doesn’t matter if you’re looking to remodel your kitchen or re-insulate your attic. You want to be sure you’re getting the most value out of your project and your loan.
Using a personal loan for home improvement can be a fast, simple way to increase the livability, curb appeal and value of your home.
Start by shopping for a personal loan offer that works best for you. To be thorough, you can compare offers from a variety of lenders such as banks, credit unions and online marketplaces.
Once you've found an offer, you can also use a loan calculator to see how much you'll pay from month to month.
Here are some of the most popular home improvement projects in the U.S. by region, and their average costs.
What is a home improvement loan?
Home improvement loans are personal loans used to fund home renovations and repairs. Like personal loans in general, most home improvement loans are unsecured. With an unsecured loan, you won’t have to tap into your home’s existing equity or use your property as collateral.
Because they don't rely on available equity, home improvement loans can be an appealing choice for:
- Borrowers with good to excellent credit
- Borrowers who have recently purchased a home
- Borrowers looking to sell a home
Home improvement loans offer relatively quick approval and lump-sum payments. Often, borrowers will receive their entire loan within a week. Once you've received your loan, you can get started on your project quickly.
How do home improvement loans compare to home equity loans or home equity lines of credit (HELOC)?
Here's a brief list of what makes home improvement loans unique:
Unsecured. Unlike home equity loans and HELOCs, there's no need to use your home as collateral. Instead, lenders rely on your credit score to determine creditworthiness.
Shorter repayment periods. Home improvement loans can be repaid over 2 to 7 years, depending on the lender.
More freedom. Loans aren't limited by the amount of available equity you have in your home. You can take as little or as much as your need.
Fixed rates. Home improvement loans come with fixed interest rates. Payments will remain stable from month to month. Borrowers can budget for their dream home without worrying about changing monthly payments.
Potentially lower closing costs. Origination fees vary per borrower's credit score, instead of a fixed 2%-5% of the loan.
When are home equity loans or HELOCs the better option?
Home equity loans may work better for those have lived in their home for years and built up serious equity. If you’re one such homeowner, home equity loans may offer lower interest rates.
HELOCs have the benefit of an extended draw period (an average of 10 years). Borrowers can delay repayments, and borrow as much or as little as they need. If you’re a homeowner facing a variety of improvement projects with different costs, HELOCs may work best.
Most HELOCs come with a variable interest rate. The amount of interest you pay is determined by a number of factors, including the Federal Reserve, investor demand for Treasury notes and bonds, and the banking industry. Each factor can affect your interest rate when your draw period ends.
How to use a home improvement loan to increase value
Not all home improvement projects are created equal. Some cost more while adding little to your property's value. Comparing a project's cost vs. its value can help determine the return you'll get when it comes time to sell.
According to the Remodeling 2018 Cost vs. Value Report (www.costvsvalue.com), the projects with the most recouped costs include:
- Garage door replacements (98.3% cost recouped)
- New manufactured stone veneers (97.1 cost recouped)
- Steel entry door replacements (91.3% cost recouped)
You always want to be sure you're getting the most bang for your buck. Luckily, there are steps you can take to ensure you're getting the highest value possible per project.
1. CONSIDER YOUR PLANS FOR THE FUTURE
Do you intend to continue living in your home for years to come? Or are you planning to sell within 5 years?
If you intend to grow old in your home, could you benefit from aging-in-place renovations? Or are you simply looking to update your home's style (and get rid of that popcorn ceiling)?
2. CONSIDER THE TYPE OF PROJECT YOU'RE LOOKING TO BEGIN
There are three different types of home improvement projects:
Repairs are renovations necessary to the sale of your home. Repairs can include projects such as new insulation, a new roof, heating/air conditioning upgrades, etc.
Midrange and upscale projects exist to increase the value of your home. Midrange refers to a standard update — a new remodel to replace the old. Upscale refers to a higher-priced, higher-quality remodel. Upscale remodels tend to cost more, but they also tend to bring more value when it's time to sell.
3. CALL YOUR LOCAL CONTRACTORS TO GET AN ESTIMATE OF YOUR PROJECT'S COST
As with loans, be sure to shop around and find the most competitive rate possible. Once you have your timeline, type of project, and cost, it's time to take out a loan.
Here's what you'll need ready before applying for a home improvement loan:
- Your credit score
- The cost of your project
- Your debt-to-income ratio
- Your personal information
Your credit score: The most favorable rates often go to borrowers with the highest credit score. Every lender you apply to is going to want to know your credit score and credit history.
The cost of your project: Home improvement projects can vary widely in cost. Remodeling your bathroom won’t cost the same as replacing your windows. Before applying, know the cost of your materials and length of your project. Don’t borrow more money than you need.
Your debt-to-income ratio: You can find your debt-to-income ratio by dividing all of your monthly debt payments by your monthly income. On average, home improvement lenders consider a 20% debt-to-income ratio low. Many lenders will consider borrowers with higher ratios, but the cutoff is around 50%.
Your personal information: This includes information like your Social Security number, mother’s maiden name, employment history, employer information, and a list of any monthly debts you may have.