How Do Home Improvement Loans Work? | Discover

Getting a home improvement loan can be a good way to cover the cost of many home-related expenses. Depending on the lender, some personal loans for home improvement can be funded quickly, which may be helpful.

For example, with Discover® Personal Loans, the 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 if something else goes wrong, and it needs to be fixed and paid for immediately.

We’ve broken down the basics on how home improvement loans work, and how they compare with other home improvement financing options.

Table of contents

• What is a home improvement loan?
• What do home improvement loans cost?
• How to finance home renovations
• Alternatives to home improvement loans
• How to get a home improvement loan
• Comparing home improvement loans
• FAQs about home improvement loans

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).

Installment loans are very predictable. You have one set regular monthly payment and a defined repayment term. So, they can be easy to work into your budget. 

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?

The total lifetime cost of a home improvement loan may depend on the type of loan you apply for. One of the main benefits of a personal loan for home improvements is they are typically a fixed interest rate. This means that you’ll pay the same rate until the loan is paid off. And you’ll have the same monthly payment.

This means you could be sure the payments fit into your budget now and in the future. Plus, you can calculate the total cost of the loan and compare it to other options. 

Interest rates for home improvement loans may vary by lender. The rate you get will be determined by your income, debt-to-income ratio, credit history, and other factors.

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 charges no fees of any kind.

How to finance home renovations

While a home improvement loan offers several benefits, it’s just one of many ways you might cover the cost of home-related expenses. You’ll 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 isn’t going to be large enough for your renovation expenses, it may make sense to think about other financing options. For example, a home equity line of credit (HELOC) or home equity loan may allow you to borrow against the equity in your home. 

Not everyone wants to use their home as collateral. Some homeowners don’t have enough equity (the value of the home minus the amount still owed). In those cases, getting a home improvement loan might still be the best financing option. 

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.

There are many ways to finance home improvement projects, each with their own set of pros and cons. We’ve laid out the basics in the table below. And here’s another article you can check out to learn about other ways to pay for home improvement projects.

*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

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 appraised 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 is similar to 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, often over time at a fixed-interest rate, according to your repayment term.

A HELOC works more like a credit card in that it's 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. 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 difficult 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 many factors, including the equity in your home and the local market. 

Keep in mind a cash out refinance can have extra costs, including closing costs and fees. You'll also have 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. It depends 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: Different lenders may offer different APRs (annual percentage rate). A lower interest rate may not always save you money if the loan has other fees. It’s good to look at the lifetime cost of the loan to compare.
• 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.

Do you still have questions about how a personal loan for home improvement works?