Personal Loans for Home Improvement

Paying for a home improvement project can be almost as complicated as buying a home. You have several options:

• Save up the money first.
• Borrow against your home through a home equity loan, line of credit or mortgage refinance.
• Use a credit card or take out a personal loan.

Obviously, saving and paying for repairs out of pocket will be the cheapest option. Secured loans such as a refinance, line of credit or home equity loan are guaranteed by your home itself; interest rates tend to be lower than on a credit card, but the borrower risks losing the home if payments aren’t made.

But if you don’t have much equity in your home, the project is relatively small in scope or you don’t feel comfortable betting the house, a personal loan or credit card can be a convenient choice.

Options to consider

A personal loan is not secured by your home; the interest rate you receive depends on your creditworthiness. Personal loans have fixed interest rates, which means you can reliably schedule monthly payments into a budget. The payback period is also shorter than a secured loan, typically two to five years.

Since the loan is unsecured, the interest rate will be higher than what you’d get on a home equity loan or line of credit. You also won’t be able to claim a tax deduction on the interest as you normally would with mortgage payments.

Personal loans for home improvement

Personal loan amounts range from $2,000 to $100,000 and vary by lender. Lenders may market the use of a personal loan for home improvement, but the interest rate will depend on your credit score, credit history and debt-to-income ratio.

Credit unions: Your local credit union is the best place to get a personal loan. Credit unions offer lower rates than online lenders, and they try to make sure your loan is affordable. The maximum APR at federal credit unions is 18%.

Federal programs: Some government programs can help pay for a home renovation. The Federal Housing Administration has two programs: Title I loans and Energy Efficient Mortgages.

• Under Title I, the U.S. Department of Housing and Urban Development authorizes lenders in each state to make home renovation loans of up to $25,000. You don’t need equity in your home to qualify, because the loan is insured by the FHA. The interest rate may be higher than a traditional secured home equity loan, and it’s determined by the lender based on market rates and your creditworthiness. Look for a “Title I Home Improvement” lender in your state on the department’s website.
• The Energy Efficient Mortgage program lets homeowners finance some part of their energy efficiency improvements, such as solar panel roofing, wall insulation and furnace duct repairs.

Online lenders: All lenders look at your credit, but some online lenders consider other factors in addition, such as your education, income and profession. You can check your interest rate at several lenders without affecting your credit, so it pays to shop around for the lowest rate.

The larger the loan, the greater the benefit of rate-shopping, because you will pay a lot more in interest for a small difference in the annual percentage rate. Below is a comparison of payments and total interest on an unsecured five-year, $25,000 home improvement personal loan at four different interest rates.

Most lenders charge the same rate for all personal loans regardless of what the borrower wants to purchase. As of August 2016, the APR range for home improvement loans was 4.29% to 11.54%. LightStream serves only borrowers with excellent credit scores and substantial incomes.

Many other online lenders cater to people with good or excellent credit, as well. Below are lenders that offer good-credit borrowers loan amounts of $25,000 or more and repayment terms of five years or longer.

Personal loans vs. other methods of financing

The best method for financing your home renovation will depend on your financial situation and how much equity you have in your home.

Credit cards: If you have excellent credit and a small- to medium-sized home improvement project, you can apply for a 0% interest credit card to cover the expenses. You should first make sure you can pay off the card before the promotional period ends, typically 12 to 18 months. If you qualify, you’ll pay no interest charges for that promotional period. However, as with any credit card, you may be tempted into overspending, and using too much of your available credit can hurt your credit scores.

If your credit isn’t great, you’re better off with a low-interest secured loan.

Home equity loans and HELOCs: Home equity loans and home equity lines of credit are still popular methods of financing a home renovation. Both are cheaper than a personal loan. A home equity loan is a lump sum at a fixed interest rate, while HELOCs have a credit limit at variable rates that fluctuate with the prime mortgage interest rate.

Cash-out refinancing is another option — you refinance your existing mortgage into a higher loan amount and use the difference to pay for your renovation.

Rates vary by lender, loan amount and the equity in your home. The interest payments on all types of home loans are usually tax-deductible.