What is a Home Improvement Loan?
How to Pay for Home Renovations
A home improvement loan allows you to finance renovations by borrowing against the value of your home’s equity. Many homeowners choose this route to fund large projects, from kitchen remodels to major repairs.
However, you aren’t limited to home equity-based loans. You can also use personal loans or credit cards to finance your home improvements, though these options typically come with higher interest rates than loans secured by your home.
Types of Home Improvement Loans
- Cash-Out Refinance: A cash-out refinance replaces your current mortgage with a new, larger mortgage, allowing you to pocket the difference in cash at closing. This cash can be used to fund home improvement projects.
- Home Equity Loan: This is a second mortgage secured by the equity in your home. Similar to a cash-out refinance, you receive a lump sum at closing that can be used to pay for renovations.
- Home Equity Line of Credit (HELOC): A HELOC provides access to a revolving credit line based on your home’s equity. You can withdraw cash as needed for your home improvements, either as a single lump sum or through multiple draws over time.
- Personal Loans and Credit Cards: These options aren’t secured by your home, meaning they often come with higher interest rates and different qualification requirements compared to home equity loans. They may still be a viable option for smaller projects or when home equity isn’t available.
What Can You Use a Home Improvement Loan For?
Home improvement loans are typically used for substantial, costly projects like kitchen or bathroom remodels, basement or attic conversions, adding decks or patios, or making significant repairs to a home’s structure or systems.
That said, the money from home improvement loans isn’t restricted to renovations. You can also use it to consolidate debt, cover educational expenses, or start a business, depending on your financial goals.
When Should You Consider a Home Improvement Loan?
The key consideration when evaluating a home improvement loan is whether you can afford it. Renovation costs can vary widely, so it’s important to estimate project costs and determine how much you’ll need to borrow.
If you plan to finance improvements with a cash-out refinance, home equity loan, or HELOC, you’ll also need to assess how much equity you have in your home. Typically, you cannot borrow 100% of your equity, so ensure that the amount available is enough to cover your planned renovations.
Home improvements can also boost your home’s value if you plan to sell in the future, making this an investment in both your living space and your property’s marketability.
What Credit Score is Needed for a Home Improvement Loan?
Credit score requirements vary by lender and loan type. For unsecured loans, such as personal loans and credit cards, a higher credit score is often required since these loans are not secured by collateral like your home.
At
eCash Mortgage, for a
cash-out refinance using a Conventional loan, we often accept a minimum credit score of
620. For cash-out refinancing with
FHA loans, we can often accept a minimum score of
550.
Are Home Improvement Loans Tax-Deductible?
Some aspects of home improvement loans may be tax-deductible under specific circumstances. For example, the interest paid on a cash-out refinance could be eligible for a deduction if certain conditions are met. Be sure to consult with a tax advisor to explore your options and learn about the tax implications of your home improvement loan.
What is the FHA 203(k) Rehabilitation Program?
The
FHA 203(k) Rehabilitation Program allows homebuyers and homeowners to finance both the purchase and renovation of a property through a single loan. Homebuyers can use the 203(k) program to buy a home and fund repairs, while current homeowners can secure financing for home rehabilitation. To learn more about the FHA 203(k) program, visit the FHA website.
eCash Mortgage currently does not offer 203(k) loans.