Learn how to turn a home improvement loan into a higher resell value and quality of life for your family
Home prices and the economy are growing again and that makes home improvement worth it as every dollar you spend can turn into more than a dollar in value.
I love home improvement projects, not just for the increase in value or the upgrade but for that pride you get from turning your house into a home.
My wife and I bought our house in 2010 and completely gutted it, all the way down to the studs. It had sat abandoned for years and we ended up putting $50,000 and what felt like millions in sweat equity into it.
When we finished, we had a home that was uniquely ours with everything we ever wanted.
We couldn’t have done it without home improvement loans, first drawing money on an unsecured personal loan and later as a home equity line of credit. It turns out that money was very well spent when the house appraised at 65% more than the total we had put into it.
What is a Home Improvement Loan?
A home improvement loan is just what it says, money you borrow to increase the value or quality of your home.
That doesn’t necessarily mean your project has to send the market value of your home soaring. A project that improves the value you perceive from your home, maybe that BBQ pit or a window seat, then it can be worth more than money.
If you are planning on taking out a home improvement loan to increase the value of your home, Remodeling Magazine’s 2016 Cost vs Value Report can help you get the most bang for your buck.
Home Improvement Projects with the Highest Payoffs:
- Attic insulation – Average cost $1,268 versus resale value $1,482 (117%)
- Bathroom remodel – Average cost $10,500 vs resale value $10,700 (102%)
- Landscaping – Average cost $4,967 vs resale value $5,000 (100%)
- Kitchen remodel – Average cost $14,913 vs resale value $14,691 (98.5%)
- Exterior improvements – Average cost $7,239 vs resale value $6,914 (95.5%)
Remember, while the increase in resale value may not recover all the costs of a home improvement project, you’re also getting the non-monetary benefits of the upgrade for years before you sell.
Home Improvement Loan Options
You’ve got four options for home improvement financing, from tapping equity in your home to taking out loans unrelated to your home’s value.
I’ve ranked the loan options for major home improvement projects by rates, from lowest to highest.
- Refinancing or taking out a second mortgage on your home usually means lower rates but much higher fees. You have to get an appraisal and it usually doesn’t make sense unless you need a loan in the tens of thousands of dollars. These loans are going to be very long-term so you might consider another source if you don’t want to be paying for that new bathroom for decades.
- Home Equity Line of Credit (HELOC) is a smaller loan to get money from the difference between your home’s value and how much you owe on the mortgage. It’s typically a smaller loan compared to refinancing but can still offer low rates because the loan is secured against your home.
- Personal Loans are unsecured, which means you don’t have to worry about getting your home foreclosed if you run into financial trouble. Rates are higher but there is no prepayment penalty. Loans are available up to $40,000 and on terms from three- to seven years.
- Credit Cards should be your last option for a home improvement loan. If you need less than $1,000 and can pay it back within a month or two, then it might make sense to charge your DIY project. Otherwise, rates of 18% and higher can make that walk-in closet a financial burden.
When we first started our home makeover, there was absolutely no equity in the house. We took out a personal loan to get things started and scored big time during Black Friday at the home improvement store. Later in the project, we were able to refinance and took out a HELOC to pay off the loan and finish the remodel.
Can I Get a Home Improvement Loan with No Equity?
If you’ve just bought your home or refinanced, you might have trouble getting a home improvement loan on the equity. There isn’t going to be much difference between your home’s value and how much you owe on the primary mortgage.
When we bought our home in 2010, it hadn’t been updated in decades. There were holes in the walls from squatters and a roof leak had destroyed the upstairs ceiling. A refi loan was definitely out of the question.
Trying to get a second mortgage or refinance for more than 80% of your home’s market value means you’ll also have to pay private mortgage insurance (PMI) which costs up to 1% of the loan amount.
If you don’t have much equity in your home or you’re close to that 80% loan-to-value on your mortgage, consider using a personal loan for your home improvement project. After your project is done, you can get another appraisal to boost your home’s value and then refinance at a lower rate without having to worry about PMI.
Since personal loans don’t charge prepayment penalties, you can pay the loan off early to save on interest.
Interest Rates on Home Improvement Loans
Home improvement loan rates will vary quite a bit depending on the source of funds and your credit score.
Borrowers with very good credit might be able to get a 30-year refinance loan at the current 3.85% fixed rate. Refinance rates range to 5% for most borrowers but you’ll usually need a credit score of at least 660 FICO to qualify.
HELOC rates are usually based of the prime rate, right now at 2.95%, plus an additional charge. They aren’t much above refinance rates with a range of 4% to 7% from most banks I checked. The problem with HELOC loans is that most will only lend you up to 65% market value so you need a considerable amount of equity in your home.
Rates for personal loans vary by website because of the credit score requirements. Stricter sites like SoFi, which also offers mortgages, can save you hundreds on interest but you’ll need a higher credit score. Peer lenders like NetCredit and PersonalLoans.com will approve borrowers with credit scores as low as 580 FICO but at higher rates.
Since it doesn’t affect your credit to check your rates on a personal loan, I recommend checking with at least two or three sites to see which ones will approve your loan and at what rate.
|P2P Lending Site||P2P Borrower Fees||Minimum Credit Score||Loan Rates||Notes|
|Personal Loans||5%||580||9.95% to 36.0%||Three options including P2P Loans, Bank Loans and Personal Loans.|
|Upstart||0% to 8%||620||5.67% to 35.99%||Best for graduates and no credit peer loans.|
|NetCredit||No Fees||520||Vary by state||No fees and transparent pricing makes NetCredit a good choice for bad credit borrowers|
|Payoff||2% to 5%||660||6% to 23%||Specializes in credit card payoff loans with no hidden fees or charges.|
|Prosper Loans||1%||640||5.95% to 32%||Very low rates on some of the lowest fees - great combination|
Credit card rates generally start at 12% for even the best credit borrowers while 18% seems to be an average rate. I’ve seen rates as high as 36% after I ruined my credit score but have managed to rebuild my credit and now get better offers.
How to Prepare for a Home Improvement Loan
There are two ways you want to prepare for a home improvement loan, depending on which type of loan you choose.
If you have some equity in your home and are planning on using a refinance or HELOC then try to fix up your home as best you can before the appraisal. This doesn’t mean you need to spend thousands just trying to get a home improvement loan but take care of minor fixes to make your home look its best.
- Clean up the landscaping, removing dead bushes and putting down some grass seed
- Paint any interior rooms that really need it, especially the first room from the entrance
- Fix any broken floor or wall tiles
If you are planning on getting a personal loan, try working on your credit score for a couple of months before applying. Even an improvement of 20 points on your FICO can mean lower rates and hundreds in savings on interest.
- Check your credit reports for errors
- Pay down revolving debt on credit cards or other lines of credit
- Don’t apply for any other loans for a few months before your application
Comparing Home Improvement Loans
Finally, don’t just compare rates on your home improvement loans. Look at the terms one each loan as well as the fine print.
- Loans secured on your property will usually offer lower rates but run the risk of defaulting and losing the property.
- Adjustable rate loans may start at a lower rate but can increase quickly, taking your payments higher with it.
- Make sure your expected payment on the loan amortizes the debt, pays it off gradually. Some loans offer deferred interest, which means an unpaid portion is added back to the loan every month, resulting in higher payments later or a big balloon payment.
- Pay attention to the number of months on the loan. Payments on a three-year loan are going to be higher than the same loan paid over five years but you’ll pay less interest.
Home improvement loans can be your chance to increase the value of your home as well as improve your quality of life. Make sure you understand your loan options as well as rates available. Put just as much planning into getting the best rates on your improvement loan as you do the project.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.