Home Renovation Loans: Finance Your House Improvements

Home Renovation Loans: Finance Your House Improvements

Kerry Vetter
by Kerry Vetter
Updated: May 11, 2022

Are you looking to renovate your home on a budget and pay closing costs? Then we’ve got great news for you. Whether you’re just starting off with your first home or you want just renovate it, it can be extremely hard to find the funds necessary to do everything you want with your space. We get it, and we’ve all been there.

Table of Contents

What is a Renovation Loan?
How Do Renovation Loans Work?
Costs & Fees for Home Renovation Loans
Why Do Homeowners Need Renovation Loans?
Home Improvement Loan Advantages & Disadvantages
Home Renovation Loans for Bad Credit History
Home Renovation Financing Options
When to Consider a Home Renovation Loan?
Home Renovation Loan FAQs

Now you can finally start on that kitchen renovation, remodel your bathroom, or even add an addition to your home—without having to worry about breaking the bank or credit union. Many financial experts have been working around the clock to develop a streamlined process for getting you access to the home equity loan you need, and now that process is ready for you. Read the article below and find out more about personal loans with good interest rates for your home renovation.

What is a Renovation Loan?

renovation loans rates

A home renovation loan is when a homeowner takes out a loan from their bank or another financial institution to pay for home improvement projects on their property. A renovation loan is usually a personal loan you repay with one monthly payment during the loan term. This personal loan product could be considered a home equity loan, but first, let’s see how you can use it. Such loan proceeds also don’t have a prepayment penalty. If you repay the loan early, you won’t pay interest.

Typical renovations include changing the layout of their home or adding in new features, such as a pool or guest house. This personal loan is based on the value of your home before any renovations have been made so if you have an older home that needs some work done this could be a good option for you.

How Do Renovation Loans Work?

Getting a home renovation loan or a home equity loan is easier than you think—and the benefits can be huge. Here’s how it works.

First, you have to identify which parts of your home need renovation and which renovations will add value to your property. For example, replacing old windows with new double-pane windows will likely increase the value of your property as well as conserve energy costs. Other improvements like kitchens and bathrooms also tend to increase the value of a property, while things like pools and water features are less likely to get you a return on your investment. Can a home equity loan do that? Let’s find out also about the loan terms!

Secondly, you apply for a personal loan to get a pre-approval. Once you have it and all the formalities were done, the loan funding takes place within one business day. As you have the access to your bank account, you are free to use money as you wish to renovate your home and pay for all closing costs.

When the due date comes each month, the home equity loan provider just withdraws the installment from your checking account. No need to stay in queues and repay the personal loan in lending offices.

Costs & Fees for Home Renovation Loans

When it comes to home renovation which is possible with a home equity loan, it’s all about return on investment. You want to create a space that’s both pleasant and personalized for you, but you also don’t want to pour money into upgrades that aren’t going to add much value when it comes time to sell your home. That’s why knowing which home equity loan upgrades are likely to pay off is so important—and why we put together this guide.

So, the fees and costs of personal loans for home improvements depend on the lending laws of your state. Each lender operates under certain laws that don’t allow them to exceed the annual percentage rates above 5% of the annual percentage rate. Plus, you can be charged an origination fee that also doesn’t exceed $10. All these costs could be higher if your credit score is less-than-perfect.

Why Do Homeowners Need Renovation Loans?

Home improvements are one of the best ways to improve your home’s value while also improving its functionality. If you’re worried that the cost is beyond your budget, there are many options available to help you cover the cost of your home improvement project.

Homeowners need house improvement loans to renovate different parts of their homes with a reasonable budget and pay for all closing costs, without getting into debt cycles. Kitchen, bedroom, pool, terrace, or guest houses can be improved within several days just with personal loans or with a home equity loan with a monthly payment and flexible loan terms.

Home Improvement Loan Advantages & Disadvantages

best home renovation loans

Before borrowing money from personal loans to renovate your house and pay for all closing costs, you should be completely informed about its advantages and disadvantages. Check the list below:

Home renovation loan advantages:

  • Improve your living conditions;
  • Increase your home’s value;
  • Be the envy of the neighborhood;
  • Save money on energy bills;
  • Make your home safer and more comfortable.

Home renovation loan disadvantages:

  • You might have to live in a mess for a while. You might have to leave your house for a time. Some home improvements can go wrong and cost more than expected. If you live in a condo, there may be restrictions on what you can do.
  • They come with high rates (approximately 3% higher than the average mortgage rates).
  • The banks prefer that you get an appraisal done before they will approve your loan. This is an extra cost that you don’t have with other types of loans.
  • High minimum credit score requirement. If your credit score is below 700, they may not be an option for you from some lenders.

Home Renovation Financing Options

There are so many ways to improve your home pay for all closing costs, from painting walls and installing new floors to upgrading your kitchen and bathrooms. You might even want to remodel a basement or room in the attic. That is why there is always a financial option for each improvement you’ve planned.

1. Cash-out refinance

Cash-out refinance is a way to get cash from your home’s equity. This doesn’t mean you have to sell your house or property—you can still lend against the value of your home through cash-out refinance, but instead of getting the money in a lump sum, you’ll get it all at once. You won’t have to pay the loan amounts back right away either; the loan amount that you refinance is often paid off over time with fixed monthly payments.

The most common reasons for a cash-out refinance are to pay off high-interest debt or make a large purchase that would be difficult to finance with another loan product. Cash-out refinances are available for those with fair credit.

2. FHA 203(k) rehab loan

Compared to cash-out refinance, an FHA 203(k) rehab loan (Fannie Mae HomeStyle loan) is a special type of home loan that lets you buy a property in need of repairs, including homes that are totally unlivable.

The main advantage of an FHA 203(k) rehab loan is that it lets you bundle your home purchase and renovation costs into one current mortgage (one loan), so you’re not taking out two separate loans. This means less paperwork and fewer fees overall. Plus, if the cost of repairs exceeds your original estimate, through FHA 203(k) loans, the extra funds can come out of your current mortgage rates, unlike what happens in cash-out refinancing.

On the downside, because FHA 203(k) rehab loans are federal programs, it’s widely believed that they tend to have stricter requirements than other types of loans.

3. Home equity loan

First off, there are two main kinds of home equity loans: home equity lines of credit (or HELOCs) and fixed-rate home equity loans. With a HELOC, the lender gives you a credit limit and you can tap into those funds by writing them checks or using a card they give you for that purpose. The interest rate for a home equity line of credit will likely be variable and usually start out low before going up after the first few years.

A fixed-rate home equity loan gives you a tax deduction when you take out the loan (because the existing mortgage interest rate is tax-deductible), but if the interest rate change, your rate stays the same. If the interest rate drops, this means your monthly payments stay the same but a bigger portion of each payment goes toward interest; if the interest rate goes up, more of each payment goes toward paying off the principal balance.

4. HELOC (home equity line of credit)

A home equity line of credit is a financial instrument that gives you access to the equity you have built up in your home. It works like this: the bank loans you money based on the loan amount of equity you have in your home. Compared to FHA 203(k) loans, your house is considered collateral by the bank or a credit union, and they will hold a lien on your property until the loan is paid off.

It’s important to note that if you default on your HELOC payments, it could result in foreclosure. It’s also important to know that HELOCs are tax-deductible—but only if your loan-to-value ratio is less than 80%, so make sure to keep an eye on how much the value of your home fluctuates.

5. Unsecured personal loans

Unsecured personal loans with monthly payments are just installment loans that don’t require collateral. The installment loan amount of money you’re able to borrow is also based on whether or not your lender offers secured loans or unsecured loans. Unsecured home improvement loan is typically smaller than secured loans because they don’t require collateral (assets) to secure the loan. Unsecured loans can range from $500 to as high as $35,000 depending on your credit score and financial situation. Secured loans generally range from $100 up to $1,000 with no origination fee.

Home Renovation Loans for Bad Credit History

renovation loans for for bad credit

The holidays can be a stressful time of year, but imagine how much more difficult it could be if your home was in need of serious repairs, plus your credit score is low.

If you’re one of the many Americans who’s found themselves in this boat, don’t panic because if your credit score. It’s not too late to get that home renovation loan for bad credit you need to make the changes you want and add thousands to the value of your property.

There are plenty of loan options out there for people who need money with bad credit scores. You just have to know where to look. So, check direct lenders that are ready to work with consumers with a poor credit history and provide personal loans for home improvements under reasonable interest rates. Usually, such lenders don’t check your credit report through major credit bureaus, but through alternative credit companies. These soft checks don’t affect borrowers’ credit scores at all.

When to Consider a Home Renovation Loan?

Consider taking the best home improvement loans or home equity loans when you tried all the options that didn’t work for your budget. Maybe an unsecured personal loan for a bad credit score didn’t help you get the maximum loan amounts you needed to repair your kitchen.

Home improvement loans will lead you to reasonable decisions while planning your renovation budget. If you need more details about these loan products, contact 1FirstCashAdvance and we will save your time by finding the best home improvement loan for your needs.

Jim Karlovec, the owner of Karlovec & Company located in Shaker Heights, Ohio, says that you should have faith in the T.E.A.M (training, empathy, action, and management) while planning and renovating your home.

“If the right team has been put together to execute clearly defined project goals then all will be well, especially when you, the client, understand that you are a key member of the team. Without an engaged client who understands her/his role it is not possible to effectively achieve project goals.”

Home Renovation Loan FAQs

  1. How to get a home improvement loan?

    When you’re thinking about overhauling your home, it might feel a bit daunting to think about getting a loan for home renovations. Is it even possible? And how do I know if I could get one with poor credit history?

    The answers are yes, it’s totally possible and yes, you can! Just apply on our website and we will help you get in touch with multiple lenders ready to provide you with personal loans for home repairs. Also, you may get home equity loans, cash-out refinance, and other renovation loan options with competitive interest rates and a flexible loan term.

  2. How to use a home improvement loan?

    You can modernize the kitchen and bathrooms, replace old sinks and toilets with sleek new ones, and upgrade kitchen appliances to stainless steel. A full remodel can cost thousands of dollars, but a few small upgrades can add value without breaking your budget.

    Or you can take out an old carpet and install hardwood flooring or tile. When you put in new flooring, make sure it matches the rest of your house—you don’t want an ultra-modern kitchen with shag carpeting from the 70s. If you don’t like the look of wood or tile, try a natural fiber carpet instead (it’ll be easier to clean up after pets).

  3. How much can I borrow with a renovation loan?

    You can borrow up to $15,000 from a personal loan for home improvements with no origination fee. But the available loan amount and interest rates may decrease if your credit score is less-than-perfect. Usually, most home renovation loans require a certain credit situation to allow you to borrow more than this amount. Consider asking home improvement lenders, before borrowing the money.

  4. Are renovation loans and home improvement loans the same thing?

    No. Most home improvement loans are actually just a form of unsecured loans and aren’t suitable for most home improvement projects due to their high-interest rates, shorter loan terms, and limited loan size.

  5. How to choose a home renovation loan?

    Home improvement loans are a great way to get your home in tip-top shape. But you have to be smart about it because there’s a lot of information out there.

    First, you should look at the available online lenders. There are lots of lenders out there, but in most cases, you need to go through one of them. And even if your bank offers one, they’re not always right for you. For example, few lenders are great because they work under a lot fewer conditions than banks or credit unions do. They’ll only make sure that you’re financially capable of paying off the loan before they give it to you—no credit checks or personal guarantees necessary. Secondly, you should look at the maximum loan amount and loan term that is available right now on the market. If all of these fit your possibilities, apply now and get a pre-approval.

 

Kerry Vetter is a consumer finance expert and writer, who has been engaged in creating finance-related content for more than ten years. Her expertise is approved by obtaining a Bachelor of Science in Finance from Boston College, as well as receiving three major certificates as a professional advisor and counselor.  At the moment, Kerry is an author of multiple educational articles and insights that have been created in order to increase and develop financial literacy and responsible borrowing among US citizens. Her expert relevant savings advice has helped a lot of people overcome their financial issues and find out more about principles of smart spending, the right investment decisions, and budgeting.  You can read more about Kerry’s professional background here.

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