6 Types of Loans You Can Use for Home Improvements

Making improvements or repairs can come with a hefty bill, and not everyone has that kind of cash lying around. The good news is that you don’t need to! Whether you’ve been planning to make improvements to your home or you’ve got sudden repairs that need to be taken care of immediately, there are a number of places you can turn to find funding. Here are 6 types of loans you can make use of for home improvements:

Home Equity Loan (HEL)

You can use the equity you’ve built up in your home to get a loan to be used in home improvements. This type of loan is called a home equity loan (HEL) and is similar to taking out a second mortgage, and repayment periods can range anywhere from 5 to 30 years. A home equity loan may be ideal for funding large one-time home remodeling projects.
Interest rates for HELs are typically low and fixed, and you can borrow up to 100% of your equity. Plus, a HEL may also be tax-deductible. But keep in mind that certain lenders may add on origination fees or other closing costs. You will also have to make extra loan payments on top of your already existing mortgage payments.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is similar to a home equity loan only in the way that it uses the built-up equity of the property. In all other ways, a HELOC works similarly to a credit card. You can borrow any amount up to a preapproved limit, and borrow again once you’ve paid the outstanding.

Unlike HELs, HELOCs also have fluctuating interest rates, but since you can limit your borrowings to only what you need at that moment, it’ll be easier to pay them back. HELOCs typically have a loan period of 5 to 20 years. They also have very minimal or no closing costs. However, since loan rates are adjustable, your payment could go up, and your bank may also charge repayment terms as well.

Cash-Out Refinance

This type of loan also makes you get a second mortgage, but you’d be paying off your first one in the process. Once you’ve done that, the remaining cash can be used for anything you want! A cash-out refinance can be one of the best options you have to gather funds for home renovations, but under one condition: that the current market rates are lower than your existing rate.
There are also a few other conditions to consider before going for a cash-out refi. Particularly, how high the closing costs are. But, if you can find a lender that offers you a significantly lower interest rate, there are a number of benefits to refinancing your mortgage. For one, you can continue paying a single mortgage and even shorten the length of your repayment period. Plus, this type of loan does not restrict what the funds should be used on.

FHA 203(k) Rehab Loan

If you’re planning on purchasing a home and you know that you will be doing renovations or repairs on it, you can get a combined loan for home improvements and a mortgage in a single go. This means that you only have to make one loan payment every month and only one closing cost as well. This type of loan is called an FHA 203(k) rehab loan and is a great option for people who purchase fixer-uppers or older homes

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FHA 203(k) programs are backed by the government, which means you can enjoy downpayments as low as 3.5% and most lenders only require a credit score of 620 or so. But these loans are typically only available for specific types of homes and specific types of home improvement projects. Plus, renovation costs must at least be $5,000. They also require you to get upfront and monthly mortgage insurance and can take a long time to close out.

Personal Loan

If borrowing against your home equity isn’t an option, you can consider getting a personal loan to fund home improvement projects. These are unsecured loans, so your home won’t be at risk. However, this also means that they come with much higher interest rates than HELs or HELOCs. But a good credit score can help you get that rate down significantly!
The most favorable feature of a personal loan is that it is easy to apply for – you can do it online! – and you can get the funds quickly, as soon as the same or the next day. This makes it ideal for emergency home repairs. Still, financial experts advise against borrowing on a whim. Personal loans have lower borrowing limits and shorter repayment terms. Plus, they have prepayment penalties and expensive late fees, and you will need to settle closing costs too.

Credit Cards

Credit cards are another quick and easy way to secure some cash for home renovations or repairs. You can use an existing card for smaller projects, but we suggest applying for a new one for renovations that cost more. This is because you can pick a card that has a 0% introductory annual percentage rate (APR) – some even offer up to 18 months at that rate!
However, home renovations aren’t cheap and you may need to get approved for a higher credit limit, or even get two cards. And don’t forget that credit cards have some of the highest interest rates and shortest repayment periods of all the loan options. Therefore, like personal loans, credit cards are best used in an emergency and not to fund larger home improvement projects.