What is a Home Improvement Loan?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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Home improvement loans are a popular option for homeowners looking to complete home renovations or additions. But are they the best option? Not necessarily, especially if you have little or no equity in your home.

In this guide, you’ll learn more about home improvement loans and how they work, along with an alternative to increase your borrowing power. 

What Is a Home Improvement Loan?

Contrary to popular belief, a home improvement loan isn’t a specific product. It’s any type of loan that’s marketed as a solution to cover the cost of a home improvement project, like home renovations and additions. 

You can get an unsecured or secured home improvement loan. If you choose the latter, you’ll have to put up collateral to get approved. And if you fall behind on payments, you risk losing your asset. 

Home Renovation Loans

Learn how the RenoFi ReFi cash-out refinance home renovation loan allows you access up to 80% of your home’s projected value after renovation.

How Do Home Improvement Loans Work?

Not all types of home improvement loans are the same. However, most are based on the equity in your home, except for personal loans disguised as home improvement loans. 

How Do You Get a Home Improvement Loan?

Home improvement loans are available through banks, online lenders and credit unions. You can also use an innovative platform, like RenoFi, to fund your renovation project. More on that shortly. 

Types of Loans You Can Use for Home Improvement

Below is an overview of the various loan options you can use to pay for home improvements

Home Equity Loans

You can borrow between 80 and 90 percent of your home’s current value minus your outstanding mortgage balance with a home equity loan. So, if your home is worth $365,000 and you owe $245,000, you could be eligible for a fixed-rate home equity loan of up to $83,500 ($365,000 * .90 – $245,000).

Loan proceeds are dispersed as a lump sum, and you’ll make equal monthly payments over a set period. Most lenders extend repayment terms between five and 20 years.

Home Equity Lines of Credit (HELOCs)

Home equity lines of credit (HELOCs) are another way to tap into your home’s equity. But unlike home equity loans, you won’t get the funds at closing. Instead, the lender gives you access to an account you can withdraw from (up to the credit limit) as needed during the draw period. You will also make interest-only payments on any funds you withdraw during this window.

When the draw period ends, the lender will convert your outstanding balance to a loan, and you’ll make principal and interest-only payments for a set period. Payment amounts could vary as the interest rate on HELOCs is variable.

Personal Loans

Personal loans are another debt product you can use to pay for home improvements. But they’re not highly recommended for a few reasons. You’ll get a fixed interest rate and make monthly installment payments. Still, the repayment period is short, and your payment amount could be hefty. Furthermore, the interest rates are typically higher than what you’d find with home equity loan products. 

Fannie Mae HomeStyle Loan

Fannie Mae HomeStyle Loans are backed by the federal government and allow you to borrow up to 95 percent of your home’s after-renovation value. The repayment term is 30 years, and you’ll pay private mortgage insurance (PMI) for the life of the loan if you borrow more than 80 percent of the projected after-renovation value. 

Construction Loan

Construction loans are another option to fund home improvements, but the application process is complex. The lender is likely to require draw schedules and approvals. Furthermore, most loans are limited to 80 percent of your projected property value once renovations are completed. 

FHA 203k Renovation Loan

Also backed by the federal government, FHA 203k Renovation Loans cater to borrowers with low credit scores or minimal funds on hand for a down payment. You could get approved for up to 96.5 percent of your property’s future value if you have a credit score of at least 580 and a down payment of 3.5 percent. You’ll also pay PMI for the life of the loan. 

Home Renovation Loans

Learn how the RenoFi ReFi cash-out refinance home renovation loan allows you access up to 80% of your home’s projected value after renovation.

Loans for Home Improvements Through RenoFi: Borrow Against the Value of Your Home After Renovation

RenoFi partners with credit unions to offer flexible home renovation loans through their innovative platform. You can borrow up to 90 percent of your home’s after-renovation value, minus your outstanding mortgage. So, if your home is worth $345,000 with a $280,000 mortgage balance, and home renovations will increase the value to $425,000, you could qualify for up to a total $102,500 ($425,000 * .90 – $280,000) loan amount. 

Loans are capped at $500,000, but you’ll need to meet strict qualification criteria to borrow over $250,000. 

Here’s how the lending process works: 

  • Step 1: Use the RenoFi Loan calculator to view potential matches. You can also gauge your borrowing power, interest rates, and monthly payment amounts. 
  • Step 2: Answer a few questions using the RenoFi Self Pre-Qualification tool to determine your approval odds with a partner in the RenoFi credit union network. The process takes around four minutes, and there’s no impact on your credit score. You will also be assigned a dedicated RenoFi Advisor. 
  • Step 3: Gather the information you’ll need to apply. This includes your most recent pay stubs, two years of W-2 forms, your most recent mortgage statement, proof of homeowners insurance and statements for bank, retirement and investment accounts. You’ll also need to provide your contractor’s information, a detailed cost estimate, renovation plans and a preliminary renovation contract to the lender. 
  • Step 4: Work with your RenoFi Advisor to select the best loan option and apply directly with the lender.

There are no draws, inspectors or contractor involvement. Furthermore, you won’t have to refinance your existing mortgage and can enjoy affordable monthly payments as loan terms of up to 30 years are available on some loan products. 

Take the first step today towards creating the home of your dreams with a renovation loan from RenoFi.


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All data provided by the Home Mortgage Disclosure Act, at cfpb.gov updated Dec, 19
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