3 Useful Ways to Pay for Major Home Renovations

home improvement loans

If you’re planning on becoming a homeowner, be prepared to spend a ton of money. As of July 2017, the average new home in the U.S. costs $371,200, reported the Census Bureau. If you can’t afford the price of a new house, you might have to turn to a fixer-upper to stay within your budget.

However, buying a cheaper home that needs repairs can be costly, too. If you want more complex changes, such as changing the cabinets in the kitchen or installing a new bathroom, your renovations can cost thousands. While paying cash is ideal, that idea is unrealistic for most young people just starting out.

Home improvement loans can help make your remodeling dreams come true. But before you sign your name on a loan application, make sure you understand what you’re getting into.

What are home improvement loans?

It’s important that your house is comfortable and works for your family needs. If it doesn’t, it can lead to a lot of stress. For example, if you have several children but only one bathroom, getting the whole family showered and ready for school and work can seem downright impossible.

If you want to put in a new bathroom, install solar panels, or just need new furniture, a home renovation loan can be exactly what you need to complete your projects.

There are three main types of home improvement loans:

1. Home equity loan

A home equity loan is when you borrow money using your house’s equity as collateral. Your home equity is the difference between your home’s value and what you’ve paid toward the mortgage.

For example, if you just purchased a $200,000 home and made a $20,000 down payment on the loan, your home’s equity is just $20,000 and you owe $180,000 on the home.

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However, your home’s equity can increase as you make mortgage payments and if the house’s value increases. If your home’s appraised value grew to $220,000 and you paid $10,000 toward your mortgage, you would have much more equity.

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With a home equity loan, you can borrow a percentage of the equity in your home. Depending on the lender, you could borrow as much as 85 percent. If your equity was $50,000, that means you could borrow up to $42,500.

Because you are using your home as collateral, interest rates for equity loans tend to be lower than other loan types. However, that can also be a problem. If you can’t keep up with your payments and default on your loan, your lender might foreclose on you and you could lose your home.

In addition, if home values decline and you owe more on your home than it’s worth, a home equity loan isn’t an option.

You can apply for a home equity loan with most banks or credit unions. The length of repayment can vary from lender to lender but typically is between five and 20 years.

2. Title I Property Improvement loan

If your home doesn’t need extensive repairs, a Title I Property Improvement loan can be a great option.

With this type of home renovation loan, the Federal Housing Administration (FHA) insures loans made by lenders to borrowers like you. If you default on your loan, the FHA’s insurance covers up to 90 percent of the loan, so there’s less risk for lenders.

You can borrow up to $25,000 if you’re using it for a single-family home, or $12,000 if you’re using it for an apartment or townhouse. Depending on the type of home you have, your repayment term could be 12 to 20 years.

The FHA does not determine interest rates. Instead, the loan’s rate can vary based on the lender and your location.

The FHA also charges an annual premium of $1 for every $100 you borrow. You pay for the insurance through a separate monthly bill, or it can be charged as a higher interest rate on your loan.

If you take out a loan for more than $7,500, you’ll need to secure the loan with your mortgage or deed of trust on the property.

Only financial institutions approved by the U.S. Department of Housing and Urban Development (HUD) can offer Title I Property Improvement loans. You can use HUD’s locator tool to find a lender near you.

3. Unsecured home improvement loan

If using your home as collateral scares you, there’s another way to get the money you need. Some banks offer unsecured home improvement loans to help you pay for repairs. Even better, they don’t require you to offer up your home or other assets as a guarantee. If you default on your debt, the lender can’t take your house from you.

Depending on the lender, you could borrow up to $100,000 and get the funds quickly. However, there are some drawbacks with going this route.

For one, the repayment term is usually much shorter than the terms for home equity loans or the Title I Property Improvement loan. Unsecured home improvement loans can have repayment periods as short as two years.

In addition, you’ll likely pay more in interest. As of August 2017, a home improvement loan from SunTrust Bank can have interest rates as high as 12.54%. If you instead use a peer-to-peer lending service like LendingClub, you could pay over 35% in interest.

While an unsecured loan can give your home more protection, you will pay a premium for that security. With higher rates, you could pay thousands more over the length of your loan.

For example, if you took out a $20,000 home equity loan at 3.99% interest with a five-year term, you’d pay back just $22,094 in total. However, if you took out an unsecured loan at 35% interest over five years, you’d pay back a staggering $42,588.

Also, unsecured home improvement loans are typically not eligible for interest deductions when tax season arrives; both home equity loans and Title I Property Improvement loans usually qualify.

If you can only get a loan with a high interest rate, it might be worth waiting until you have more equity in your home before borrowing.

Finance home improvement jobs carefully

Before applying for home improvement loans, make sure you have a plan and budget in place to repay what you borrow.

Those new granite countertops or stainless steel appliances will seem far less attractive when you’re strapped for cash and can’t afford your payments. Knowing what you can truly afford can help you enjoy the renovations guilt-free.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal LoansFixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 4.98% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 21, 2017 and are subject to change without notice. Not all rates and amounts available in all states. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 4.98% APR assumes current 1-month LIBOR rate of 1.34% plus 3.89% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 4.99% – 16.24% (4.99% – 16.24% APR) based on applicable terms. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
4.98% - 14.24%1$5,000 - $100,000
Check rate nowon SLH's secure site
8.00% - 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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