Jul 03, 2023

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Man and woman shake hands with contractor on their home remodel project

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.

Table of contents

What is a home improvement loan?

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.

What do home improvement loans cost?

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.

How to finance home renovations

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
  • Fixed rate, flexible repayment terms
  • Online application
  • Receive funds as a lump sum
  • No collateral required
  • Good for emergency home repairs
  • Loan rates driven by creditworthiness
  • Borrowing limit might be lower than other options
  • Shorter loan repayment terms than other options
Home equity loan* A loan for a fixed amount secured by the equity in your home
  • Interest rates are usually fixed, repayment terms typically from 10 to 30 years
  • Fixed rates allow payments that stay the same every month
  • Some lenders let you borrow up to 90% of your Combined Loan to Value (CLTV)
  • Secured by your home
  • Risk of foreclosure if you fail to make payments
  • Could be a monthly payment on top of your existing mortgage
Home equity line of credit (HELOC) A revolving line of credit secured by your home
  • As you repay your outstanding balance, your available credit Is replenished like a credit card
  • Draw period typically ranges from 5 to 10 years, after which you can no longer withdraw funds and line may convert to a fixed rate loan
  • Secured by your home
  • Risk of foreclosure if you fail to make payments
  • Loan rates often variable, so your rate and payment could go up or down
Cash out refinance Take out a loan for a larger amount than your existing mortgage   and receive the difference in cash
  • Can lower your interest rate or term
  • One mortgage payment
  • Receive cash from your home’s equity to spend on almost anything
  • Typically includes closing costs
  • New loan with a bigger balance
  • Loan term starts over
Government loans Title 1 Loans** you[SH1]  can use for little or no expense
  • Loose qualification requirements
  • No minimum credit or income required
  • No equity needed
  • Unsecured loans available, in certain circumstances
  •  Low Fixed-interest rates
  • Unsecured loans available, in certain circumstances
  • Low Fixed-interest rates
  • Must use an approved lender
  • Must pay insurance premium of 1% per $100 of loan amount annually
  • Repair types may be limited by the lender.
  • Must pay insurance premium of 1% per $100 of loan amount annually 
  • Repair types may be limited by the lender.

*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.

Alternatives to home improvement loans

Home equity financing for home improvements

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.

Cash out refinance for home improvements

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.

How to get a home improvement loan

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.

Comparing home improvement loans

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:

  • APR: Lenders will often differ in the APR (annual percentage rate) they offer to you. A lower interest rate may not always save you money if the loan has other fees.
  • Loan amount: Depending on your credit history, a lender may not offer the full loan amount you apply for. The loan amount offered to you can vary by lender.
  • Monthly payments: Compare what each loan will cost you monthly and consider what works with your budget. This will depend on your repayment term and APR.
  • Loan features: Fees, penalties for missing or late payments, and the ability to add a cosigner can vary by lender. Find the features that matter to you, and make sure your lender offers them. 

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?

Learn More About Home Improvement Loans

FAQs about home improvement loans

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