Home improvement loans help you finance renovations, updates and repairs that can add value and enjoyment to your home. Many homeowners are making alterations big and small and seeking home improvement financing for them as the coronavirus pandemic means needing space for work and school at home.

If you’re looking for a way to pay, you’ll first need to understand how home improvement loans work and compare financing options. This guide covers home improvement loan types, costs, qualification requirements and steps to choose the best home improvement loans.

If you’re ready to finance home improvements, start here. What you’ll learn:

A home improvement loan is financing you use to pay for home remodeling or repairs. When you get a home improvement loan, you use the loan funds to pay your contractor or buy supplies to complete the work, then pay the loan off over time. A home improvement loan is helpful if you don’t have cash to pay upfront for home improvement expenses.

Home equity loans and personal loans are the most common types of home improvement loans, but there are other options, such as cash-out refinancing. Banks, credit unions and online lenders may offer home improvement loans.

The type of loan you choose will depend in large part on the scale of your home improvement project. For minor projects like painting, a short-term personal loan or even using a credit card might be the best option. For major projects like a roof or room addition, you may need to tap into your home’s equity by securing a home equity loan.

A home equity loan is a second mortgage offered by banks, credit unions and other lenders that is secured by the equity in your home. You have two options for a home equity loan: a traditional home equity loan or a home equity line of credit.

With a home equity loan, you repay the balance with equal monthly payments over a fixed term, just like your original mortgage. A HELOC works more like a credit card, allowing you to use your home equity line during the draw period and repay it over time. With either option, if you don’t repay the loan as agreed, your lender can foreclose on your home.

Another option for tapping equity is a cash-out refinance. However, instead of taking out a second mortgage as you would with a home equity loan, a cash-out refinance replaces your original mortgage. You’ll access your equity to get cash at closing, which you can use to make home improvements. Your refinanced home loan will have a new balance, payment, interest rate and repayment terms.

How much equity can you borrow?

Lenders usually limit total loans to 85% of the value of your home. This is the total loan-to-value ratio. However, some offer home equity loans that bring your total mortgaged value up to 100%.

As with any loan, the actual amount offered depends on additional factors, including your annual income and credit history.

Typically, home equity loans have fixed interest rates. The rates stay the same over the life of the loan, so your monthly payments never change.

HELOC interest rates are generally variable, which means they can go up or down according to a benchmark rate.

Home equity loan interest rates are typically slightly higher than mortgage rates. Your home improvement loan rate will depend on your home’s value, loan terms and amount, your credit history and score, income, and mortgage balance.

The annual percentage rate determines how much interest and additional costs, such as fees, you’ll pay to the lender over the life of the loan. The lower the home improvement loan rate, the less the loan will cost you overall, so search for the most competitive rate you can qualify for.

Fees can include closing costs, late fees and processing fees. Lenders may roll fees, closing costs and other costs, such as the origination fee, appraisal, title search and credit report fee, into the loan balance so you don’t have to pay these costs at closing.

Home Equity Loan Advantages

Home Equity Loan Disadvantages

Using a personal loan for home improvement is like any unsecured loan. It’s not secured by your home, and your home improvement loan rate depends on your creditworthiness. Personal loans usually have a fixed interest rate, which means you can reliably schedule monthly payments into your budget.

The payback period on personal loans, typically two to five years, is shorter than on home equity loans, which can be up to 30 years.

Personal loans generally have loan amounts between $1,000 and $100,000.

Personal loan rates have an APR that includes interest rates, fees and other costs. Although personal loans are usually offered at fixed interest rates, some lenders offer variable-rate personal loans.

Personal loan rates may vary based on your credit and other factors, ranging from about 4% to 36%. Unsecured personal loans will typically have a higher interest rate than a home equity loan, but you might qualify for a lower interest rate if you have excellent credit and high income, which lessen the risk for the lender that you will repay the loan.

Application or origination fee. The application or origination fee is what you pay the lender to process the loan. It’s common for lenders to roll the origination fee into the loan balance rather than as a closing cost. Personal loan origination fees are usually between 1% and 6%.

Late fee. Expect a late fee if your payment is not on time. Lenders may offer a grace period of 10 to 15 days, after which a late fee applies. These fees typically range from $15 to 5% of the payment due.

Other fees. Some lenders charge additional fees, including returned payment or check processing fees.

Personal Loan Disadvantages

Before you apply for a home improvement loan, determine the best home improvement loan options for you. Understand how much you need to borrow, the terms that work for you, and what you should do to find the best home improvement loan rates.

Know when to get a home improvement loan.

Apply for a home improvement loan well before you plan to start improvements, advises Charles Nilsen, executive vice president and national director of residential and personal lending at Boston Private wealth management company. He advises borrowers to start the process at least 30 days in advance to allow time for loan processing.

Determine how much you need.

Consider your home improvement project amount and leave room for error. Jensen cautions against taking out a property improvement loan that strains your finances to make cosmetic improvements. It isn’t worth going into foreclosure just to have a nicer kitchen, she says.

Determine your preferred loan term.

Consider your budget and how quickly you can pay off the loan. A long-term home equity loan makes sense for some long-term improvements, such as a room addition or new roof. But you shouldn’t get a 30-year loan for minor home renovations that will be replaced before you’re done paying for them, such as flooring.

Get prequalified with lenders to compare home improvement loan rates and terms. You can get prequalified with multiple lenders by sharing your Social Security number and other basic information, but you should verify they are only performing a soft credit check, as multiple hard inquiries can ding your credit rating.

Consider your eligibility.

Before you apply, consider how qualified you are for the loan. Your credit history and credit score, loan-to-value ratio and debt-to-income ratio are important factors in approval and qualifying for the best rates.

Home improvement lenders typically have minimum credit score requirements to be approved for a home improvement loan. Generally, you’ll need at least a 620 FICO credit score to be approved for a home improvement loan. Review your credit report to check for errors and work on paying down debt, especially on any delinquent accounts, before you apply for a home improvement loan.

Compare home improvement lenders to find the loan that aligns with your needs. The best lender for you offers a loan that you can qualify for at the right amount with the lowest APR.

Focus on these four key areas when choosing a home improvement lender: eligibility requirements, loan amounts, APR and customer service.

Don’t waste time and money applying for a loan you won’t be approved for. Find out a lender’s minimum qualifications and get prequalified with the lenders most likely to grant you the loan.

All home equity loans have maximum loan-to-value amounts. Some have minimum and maximum loan amounts as well, regardless of your needs or your home’s equity. You don’t want to choose a lender that requires you to take out a loan larger than you need, and you don’t want to pick one that won’t lend you enough for your purposes.

Compare home improvement rates by getting prequalified rate quotes. Be sure you’re comparing apples to apples when you consider a loan’s APR and fees. A lender may have no closing costs and a higher APR that could cost you more in the long run than a lender with some closing costs that offers lower interest.