How to get a home improvement loan
If you're considering a home improvement project, it's important to know about the different types of loans available to help finance your project.
A home improvement loan can help you pay for materials and labor, and there are various options to choose from. The type of loan you choose depends on your needs and the scope of your project.
The essentials of getting a home improvement loan
- To get a home improvement loan, you'll need to determine your budget, compare loan options and shop around for rates, choose a loan type that best suits your needs, and apply for the loan.
- Home equity loans, HELOCs (home equity line of credit), and cash-out refinances all require similar steps for approval.
- It's important to know the different types of home improvement loans available and to compare rates before applying for one.
Steps to getting a home improvement loan
You have several options for getting a home improvement loan to finance your project. Home equity loans, home equity lines of credit (HELOCs), and cash-out refinance all require similar steps for approval. Here's an overview of the steps you should take to secure a home improvement loan.
Step 1: Determine your budget for the home improvement project
Before you even begin looking at loan options or shopping around for rates, it's vital to determine your budget. This means figuring out how much money you need and how much in monthly payments you can afford. Be sure to factor in any costs associated with labor, materials, and any additional fees for securing the loan.
Taking the time to figure out these two critical pieces of information makes the rest of the process easier and less stressful.
Step 2: Compare loan options and shop loan rates
Once you know what kind of budget you're working with, it's time to compare loan options and shop around for rates. Depending on your financial situation, different lenders offer varying rates and terms, so take your time researching which option is best for you.
Some online calculators can help you estimate monthly payments based on the amount of money you’d like to borrow, interest rate, and length of the repayment period.
Step 3: Choose a home improvement loan
After researching different types of loans, it's time to decide which option is best for your situation. There are three main types of home improvement loans available — home equity loans, HELOCs, and cash-out refinances — each with its own advantages and disadvantages.
Depending on the size of your project and how quickly you want the money, one option might be better than another for your situation.
Step 4: Apply for the home improvement loan
Now that you have chosen which type of loan fits your needs best, it's time to apply. Most lenders require basic information from applicants, including:
- Income verification documents
- Proof of homeownership
- Estimated renovation costs (particularly for larger projects)
- Additional paperwork
The specific requirements can vary depending on the lender or type of loan you're requesting.
Ensure all necessary paperwork is filled out accurately before submitting it for approval — this will help with efficient processing!
Types of home improvement loans
Whether you're upgrading your kitchen, replacing old flooring, or adding a fresh coat of paint, it's useful to know about the different types of home improvement loans available.
While there is no one specific home improvement loan, there are a few different loans that you can use to finance home improvements.
Let's look at the different kinds of loans that can help bring your home remodeling dreams to fruition.
Home equity loan
With a home equity loan, you can usually borrow between 80% and 85% of your total home value (the amount you paid for it minus any mortgage debt). A home equity loan allows you to borrow a lump sum and make fixed monthly payments over time, making it easy to budget for.
A Home Equity Line of Credit (HELOC)
A HELOC is like a home equity loan, but instead of borrowing a lump sum upfront, you get access to a line of credit that you can draw from as needed up to an approved limit.
The main advantage of a HELOC is that it offers more flexibility than other types since you can borrow exactly what you need when you need it. The downside is that HELOCs usually come with variable interest rates, so if interest rates rise over time, so will your payment amounts.
Please note: Discover® Home Loans offers a home equity loan product, but does not offer HELOCs.
A cash-out refinance is a mortgage refinancing where the new loan is larger than your current loan to convert home equity into cash. The difference between the two loans is given to the borrower in cash.
This option can benefit homeowners who need extra money for home improvements. However, cash-out refinance typically has a higher interest rate than a traditional mortgage, so it's important to consider the pros and cons before deciding if a refinance is right for you.
You can use the cash-out refinance calculator from Discover® Home Loans to figure out how much cash you might be eligible to receive.
Using a credit card may be one of the fastest ways to fund your project since you may get approval in minutes and start making purchases immediately. But because interest rates for credit cards tend to be higher than other financing options, you should use them if you plan on paying off your balance quickly.
It's also important to remember that many stores offer promotional financing plans with no interest if paid off within a certain time frame. These options can be helpful if used responsibly but should also be avoided if not appropriately managed, as any missed payments will result in high late fees and interest charges.