Jul 03, 2023
A home improvement loan typically refers to an unsecured personal loan used to pay for home upgrades—from remodeling or renovations to repairs and new furniture.
Home improvement loans are often a good way to cover the cost of many home-related expenses. Some loans may take longer to get approved. Depending on the lender, some personal loans for home improvement can be funded quickly.
For example, with Discover® Personal Loans, your money can be sent as soon as the next business day after acceptance. That could make a personal loan a smart choice when the roof suddenly leaks or something else goes wrong, and it needs to be fixed and paid for immediately.
Read on to learn how home improvement loans work, and how they compare with other home improvement financing options.
Like other personal loans, a home improvement loan is an unsecured installment loan used to pay for home-related costs. That means it doesn’t require collateral (like your home or car).
But that isn’t the only advantage. Installment loans are very predictable, so they’re easy to work into your budget. You’ll have one set regular monthly payment and a defined repayment term.
How much you can borrow will differ from lender to lender. For example, with Discover Personal Loans, you can apply for up to $40,000.
That can depend on the type of loan you apply for. One of the main benefits of a personal loan for home improvements is a fixed-interest rate: You’ll pay the same rate until the loan is paid off. This means you can be sure the payments fit into your budget now and in the future. The rate you get will be determined by your income, debt-to-income ratio, credit history, and other factors.
Interest rates for home improvement loans will also depend on the lender. Some lenders charge origination fees and other costs, which can make the loan more expensive even if the interest rate seems low. Discover Personal Loans doesn’t charge any fees as long as you pay on time.
While a home improvement loan offers a number of benefits, it is just one of many ways to cover the cost of home-related expenses. You will want to weigh your needs against all your potential financing options to decide which one is best for you. Some factors to consider include cost estimates, personal preferences, and your budget.
When a personal loan does not meet your estimated costs, it may makes sense to think about other financing options like a home equity line of credit (HELOC) or home equity loan, which allow you to borrow against the equity in your home.
Not everyone wants to use their home as collateral. And some homeowners do not have enough equity (the value of the home minus the amount still owed). In those cases, a home improvement loan might still be the best financing option.
But if you have enough equity in your home and you want to borrow more than a home improvement loan allows, a different type of loan might be better. Read on to learn about other ways to pay for home improvement projects.
| Home improvement financing options | What it is | Pros | Cons |
|---|---|---|---|
| Home improvement loan | Personal, unsecured loan with an interest rate based on credit history, income, and other factors |
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| Home equity loan* | A loan for a fixed amount secured by the equity in your home |
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| Home equity line of credit (HELOC) | A revolving line of credit secured by your home |
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| Cash out refinance | Take out a loan for a larger amount than your existing mortgage and receive the difference in cash |
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| Government loans | Title 1 Loans** you can use for little or no expense |
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*Please note: Discover® Home Loans offers home equity loan and mortgage refinance products but does not offer HELOCs or Government-backed home loans.
**Learn more about Title 1 Property Improvement Loans at the U.S. Department of Housing and Urban Development
There are many ways to finance home improvement projects, each with their own set of pros and cons.
Home equity loans and HELOCs allow you to borrow against the equity in your home. As a result, they might come with lower interest rates than an unsecured home improvement loan.
With a home equity loan, most lenders will allow you to borrow only up to 90% of your home’s value, minus what you owe on your mortgage. How much you can borrow and the rate you get will depend on your credit history and other factors.
A home equity loan works like a home improvement loan: You apply for the amount you need and, if approved, you get the funds in a lump sum. Then you pay back the full amount over time at a fixed-interest rate, according to your repayment term.
A HELOC works more like a credit card in that it is a revolving line of credit. That means you borrow money throughout your borrowing period—typically 10 years—as you need it. You repay what you borrowed, often with a variable interest rate, and as you pay it back, the credit line remains in place for you to borrow from again, up to the borrowing period. Variable interest rates can make revolving credit tricky to work into a budget. At the end of your HELOC, your credit line may convert to a fixed rate installment loan if you have remaining payments.
A cash out refinance can be another way to pay for your home renovation. This option gives you a new, bigger mortgage that you use to pay off your old mortgage. Once you pay off your first mortgage, you keep the difference between those two amounts as part of your new first mortgage. How much you get from a cash out refinance will depend on multiple factors, including the equity in your home and the local market.
Keep in mind: A cash out refinance can have additional costs, including closing costs and fees. There is also a new repayment term and a new interest rate. But once you do get the money, you can use it for any purpose, including improving the exterior of your home.
Getting financing for your home renovation can be simple and fast or a more-involved process, depending on what kind of financing you apply for.
Before you apply for a loan, estimate how much money you’ll need for the project you have in mind. Then assess your financial situation and decide which loan type works best for you. Don’t forget to include unexpected costs; you don’t want to run out of money before you finish your project.
Once you’re ready to apply for the loan, check your eligibility. Many loans will have income, credit, age, and citizenship requirements. Then gather the documents your lender will need to verify your personal information.
Before accepting a loan, be sure to compare offers from different lenders since not all offers will be the same. When comparing offers, look at:
Once you have the loan in hand, you can start using it to bring your home improvement projects to life.
Still have questions about how a personal loan for home improvement works?
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