Money 101  >   Personal Loans   >   How do Home Improvement Loans Work?

schedule 6 min read | March 12, 2021

How do Home Improvement Loans Work?

Written by Daniel Azzoli

Whatever stage of life you’re in, your home is likely going to be a big part of it. Whether you work from home – something a lot of us have had to get used to over the course of 2020 and into 2021 – are raising a family, or even if you live alone, if your home is something you care about, you’re going to want to take good care of it.

This can mean different things to different people. You might be looking to take on a massive home improvement project, or you may just need to make a few small fixes here and there. Either way, these things don’t always come cheap. If you’re looking to make some upgrades or repairs to your home, you may be in need of a little (or a lot of) extra money. If you find yourself in this situation, you might have a few different options when it comes to financing. The key is to educate yourself on your potential options, understand the differences between the different home improvement loans out there, and try to determine what would work best for your situation.

Today, we’re going to look at different types of home improvement loans, when to use one, and whether or not you should be considering extra financing for your renovation or repair in the first place.

When to Consider a Personal Loan for Home Improvement

Before we go over the different types of home improvement loans, it’s important to start by establishing whether or not you should be applying for one to begin with. The size and type of project you’re looking to start is going to play a big role in this. If you want to do a small to medium-sized cosmetic renovation, ideally, you’d be able to save up for this well in advance and avoid having to apply for a personal loan at all. The truth is, these projects often don’t go according to plan. Emergency repairs may crop up along the way, and if you’re undergoing a large-scale renovation, it may not be realistic to save up for the entire cost ahead of time.

A bunch of ladders in an unfinished building.

When you’re trying to figure out if applying for a personal loan for home improvement is the right move, start by looking at your budget. Are you able to fit an extra monthly expense (in the form of a loan repayment) in? If so, how much? And for how long? If you’re looking to sell the home you’re renovating, how much will the renovation increase the value of the home? Will this offset the cost of the renovation?

Consider these questions carefully before applying for a loan. If you feel like you’re in a healthy place with your finances and you can comfortably fit the extra expense into your budget, then it may be worth it.

3 Types of Home Improvement Loans

If you’ve taken stock of your situation and decide that applying for extra financing is the right move, there are a few different options you may be able to go with depending on your financial standing and your particular needs. While there may be more potential options than what we’ve listed below, here are three common types of home improvement loans that may work for you.

1. Home Equity Lines of Credit

A home equity line of credit – also known as a HELOC – is a popular way to get extra funding for a home renovation project.

To start with, one of the most important features of a HELOC is that it’s a secured loan. In order to qualify for a secured loan, you’ll need to pledge some sort of asset as collateral. This helps to assure that if you default on your loan payments, the financial institution providing the loan will still be able to recoup some sort of payment. In the case of a home equity line of credit, the collateral you’re providing is your actual home. The benefit of a secured loan is that because the financial institution has some sort of assurance that they’ll get some form of payment, the home improvement loan rates of these types of loans may be lower than you’d find with an unsecured loan.

Another important feature of a HELOC is that it’s a form of revolving credit. This means that it acts similarly to a credit card or other types of lines of credit, in that you’ll be given a credit limit to borrow against. You can generally borrow from your line of credit anytime during the draw period and you only have to pay charges on the funds you take out. However, make sure that you know which phase your HELOC is in and if it has entered the repayment phase. That will determine if you can draw any funds at all and what your payments will look like[1].

Person looking at a lamp shade sitting on a floor.

If your home improvement project is going to be a long one and you don’t know exactly how much money it’ll cost you, a HELOC may be a useful option. If you need more or less money than you thought you would, you can adjust the amount you draw from your line of credit accordingly. Just keep in mind that the stakes are high if you don’t repay what you’ve borrowed. In the case of a HELOC, missed payments can lead to eventual foreclosure on your home.

Another important detail of HELOCs to be aware of is that in order to use your home as collateral, you’ll need to have a minimum amount of equity in it, which will generally be at least fifteen percent[2]. It’s also important to keep in mind that the amount of equity you have in your home will limit the amount of money you can be approved for.

2. Home Equity Loans

If you’re looking to undertake a big home improvement project but don’t want to apply for a HELOC, a home equity loan may be another option for you. One of the big distinctions between the two is that with a home equity loan, you’ll receive your funds in a lump sum that you’ll then repay in fixed, regularly scheduled installments. The length of your repayment period can vary based on a number of factors, but considering that the size of the loan is likely on the bigger side, you’ll often pay it back over the course of several years.

If you have the exact cost of your project in hand, a home equity loan can be a good option. The scheduled and fixed nature of the repayment process can may it easier for you to work these repayments into your normal budget.

But just like a HELOC, you can only get approved for a home equity loan by pledging your house as collateral. So if you start to miss payments, your house can go into foreclosure.

3. An Unsecured Personal Line of Credit

This type of line of credit is less of a personal loan for home improvement, and more of a way to help you handle an unexpected but essential home repair that you can’t afford with your emergency fund alone.

Unlike the previous two entries on this list, these personal loans are unsecured, meaning you won’t need to provide any collateral to get approved. Instead, a financial institution may assess your creditworthiness by looking at things like your credit score, your income, and more. This also means that because you’re not backing your application up with collateral, interest rates may be higher than they would be with a secured loan.

Person installing new flooring.

Just like HELOCs, a personal line of credit is a form of revolving credit. Depending on the financial institution you’re working with, you may be able to request a draw and receive your funds as soon as the same business day. This is an important detail to keep in mind because when it comes to using these as a personal loan for home improvement, they should really only be used to help with emergency repairs. When that’s the case, you’re going to want a quick turnaround from when you apply for the loan to when you receive your funds.

Do Your Research When Considering Home Improvement Loans

Whether you’re undertaking a large home renovation project, or you’re just trying to take care of a small home repair before it turns into a bigger problem, making improvements to your house can be an expensive venture. If you have the luxury of foresight, try to save money regularly leading up to your project. This way, you may be able to avoid needing a personal loan altogether. But if you can only save so much in advance, or if you run into an emergency that needs your immediate attention, there may be a personal loan for home improvement out there that suits your needs.

Make sure to start by assessing whether you should be applying for home improvement loans in the first place, and if you feel like you have the need for one and have the means to pay it off, you can start to match the different options out there to your particular situation. Be thorough and patient, and hopefully you’ll find something that works for you!

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.



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