Image result for pictures of homes being renovated

Your home is an investment, and home improvement loans can offer the funding you need to strengthen that investment with renovations, updates and repairs. However, there are risks involved, and not all home improvement loans are the same. 

This guide covers the types of home improvement loans available, the costs of a home improvement loan, how to qualify and how to choose the best lender. It is designed to help you decide if accessing your home’s equity or taking out a personal loan for home improvement is a good choice, and offer insight into how you can find the best loan for your needs.

Types of Home Improvement Loans

The type of loan you choose will depend in large part on the scale of your project. For smaller projects, a short-term personal loan might be the best option. For major projects, you may need to tap into your home’s equity by securing a home equity loan. 

Home Equity Loans

home equity loan is a second mortgage for a fixed amount of money that is secured by your home. You repay the loan with equal monthly payments over a fixed term, just like your original mortgage. If you don’t repay the loan as agreed, your lender can foreclose on your home.

How much equity can you borrow?

Lenders usually limit total loans to 85 percent 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 percent.

For example, if you originally bought your home for $250,000 and have since paid $60,000 on your mortgage, you now have $60,000 in equity and a loan balance of $190,000, provided that your home’s value has remained the same. Combined with your first mortgage, a lender typically would allow you to borrow up to 85 percent of the value of your home, or $212,500. After subtracting what you still owe on your mortgage, you have $22,500 in available equity left to borrow.

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

Interest

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.

Home equity loan interest rates are typically slightly higher than mortgage rates. Most banks start with a benchmark rate, such as the prime rate, and adjust your rate based on factors including your home’s value, loan terms and amount, your credit history, income and existing mortgage balance. 

APR

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 rate, the less the loan will cost you overall, so search for the most competitive rate you can qualify for.

Fees

Fees can include closing costs, late fees and processing fees. Often, lenders factor most closing costs into the loan balance rather than requiring payment at closing.

Typical home equity loan fees include:

Application or origination fee: The origination fee is the upfront fee a lender charges to process a new loan application. Most lenders have an origination fee of $0 to $50 for home equity loans.

Appraisal fee: Appraisal fees cover the cost to appraise your home. An automated valuation model appraisal is typically $150 or less, while more complex home appraisals for those with significant repairs or upgrades may have a fee of about $1,000.

Image result for pictures of homes being renovated

Notary signing services: Some loan documents require a notary. With multiple documents, you could have notary fees of about $100.

Title search and insurance: Title search and insurance is typically between a few hundred dollars to $1,000. This fee pays for lenders to verify that you’re the owner of the property you are drawing equity from. However, if you’re taking out a home equity loan with your original mortgage lender, you should ask if there is a reissue rate available, as you may be eligible. Most states allow reissue rates on properties owned for 10 years or less, but it can range from two to 15 years.

Credit report fee: Before making a lending commitment, lenders will check your credit to determine your creditworthiness. This fee is typically up to $50.

Flood elevation certificate: With this certificate, your flood elevation is documented so lenders can determine whether you are required to have flood insurance. You can expect to pay $350 for this certificate.

Tax check: Lenders will perform a tax check to verify that you’re current on property taxes, with a fee of around $10.

Points: Most lenders will allow you to pay upfront to reduce your interest rate. One point costs 1 percent of your loan amount. Terms vary by lender, but buying points is typically beneficial for those who plan to stay in their home for an extended period of time.

Additional closing costs: There may be additional closing costs depending on the documentation required by the lender.

Annual maintenance fee: Although annual maintenance fees are more common with home equity lines of credit, some home equity loans have an annual fee for the duration of the loan.

Late fee: If you make a late payment, most lenders will charge a late fee. Some offer a grace period, such as 15 days. However, interest will continue to accrue during this period, so paying late will cost more, even if you don’t incur a late fee.

Other fees: Lenders may have other fees, such as a fee for processing checks or a fee for returned checks.

Home Equity Loan Advantages

  • Lower interest rates: Home equity loans typically have much lower interest rates than credit card APRs. There is less risk for the lender because your loan is secured by collateral, and lower risk translates to lower interest rates.
  • Larger loan amount: Personal loans are typically restricted to a maximum of $50,000. Home equity loans are generally limited to 85 percent of the value of your home minus what you still owe on your current mortgage. Lenders will want you to stay below the maximum loan-to-value and debt-to-income ratios.
  • Tax deduction: If you’re making capital improvements to your home, the interest you pay for your home equity loan may be tax deductible if your combined first and second mortgage debt does not exceed $750,000.

Home Equity Loan Disadvantages

  • Reduction of equity: When you draw on your home equity, it’s not equity anymore. It’s a second, smaller mortgage. Any amount that you borrow subtracts that same amount from the equity you’ve built.
  • Risk of foreclosure: The lender can foreclose on your home if you fail to repay the loan, as you’re using your home’s equity as collateral.
  • Long-term payments: If you use a long-term home equity loan for a short-term expense, even with a lower APR, you could pay more interest over time than if you had used a different form of financing. Home equity loans are commonly available for up to 30 years, while personal loans typically have a maximum repayment period of seven years.
  • Greater liability: If you sell your home, all mortgages, including a home equity loan, will need to be repaid immediately upon sale. If your loan was for a home improvement that increased your home’s value, the difference may cover the immediate loan payment. However, home renovations do not typically offer a 100 percent return on investment.
  • Equity qualification: Home equity lenders have strict loan-to-value qualifications, so you may not be approved if you don’t have enough equity in your property. Personal loan lenders don’t consider your home’s equity when making approvals.

Personal Loans

personal loan used for home improvement is like any unsecured personal loan. It’s not guaranteed by your home, and the interest rate you receive 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 range from five to 30 years.

How much can you borrow?

Personal loans are available for amounts between $1,000 and $50,000.

APR

Like home equity loans, personal loans have an APR that includes interest and additional fees. You should seek out the lowest APR you can qualify for.

Typically, personal loans are offered at a fixed interest rate, though some lenders offer variable-rate personal loans. 

Interest rates offered for personal loans vary significantly, ranging from about 2.5 to 36 percent. You may qualify for a lower interest rate on a personal loan than a home equity loan in some circumstances, such as if you have excellent credit and income. However, as an unsecured loan, personal loans will typically have a higher interest rate than a home equity loan.

Fees

Application or origination fee: As with a home equity loan, 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 to 6 percent.

Prepayment fee: Some lenders charge a fee for making payments ahead of schedule to offset the interest you’ll save by paying early. This fee is not common among personal loan lenders.

Late fee: You’ll typically be charged 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 percent of the payment due.

Other fees: Some lenders charge additional fees, including returned payment or check processing. These fees can increase the total cost of your loan. It’s always smart to look for the lender with the least fees, but it’s also important to calculate those fees along with your total interest payments to see which loan is the cheapest over time. 

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 and a lower rate.

Personal Loan Advantages

  • You don’t need equity: Personal loans don’t draw on your home’s equity, so you can qualify even if you don’t have significant equity in your home. Mindy Jensen, BiggerPockets real estate investment community manager, recommends taking out a personal loan if you don’t have significant equity in your home. BiggerPockets is a real estate social network and informational site.
  • You can borrow smaller amounts: Personal loans are available for as little as $1,000, but home equity loans often have a minimum of at least $10,000.

Personal Loan Disadvantages

  • Higher interest rates: Typically, personal loans have higher interest rates than home equity loans, so you’ll pay more to borrow with a personal loan.
  • Shorter repayment periods: Personal loans usually have a repayment period of two to five years, while most home equity loans have terms between five and 30 years. A shorter repayment period can be good for quickly paying off small amounts, but if you’re financing an expensive home improvement project on a short repayment period, the monthly payments may be too large for your budget.

Applying for a Home Improvement Loan

Apply before you need to start improvements.

It’s a good idea to plan ahead and apply for a home improvement loan well before you plan to start improvements, advises Charlie Nilsen, executive vice president of Boston Private, a wealth management company. Timing and paperwork may take longer than you expect. He advises borrowers to start the process at least 30 days in advance.

Determine how much you need.

Consider your project amount and leave room for error. Keep in mind your budget, total loan-to-value ratio and how long you want to pay for the improvement. 

Jensen cautions against taking out a home 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 home equity loan for minor renovations that will be replaced before you’re done paying for them, such as flooring.

Get prequalified.

Get prequalified with lenders to find out what interest rates you’ll qualify for. This will allow you to compare what different lenders have to offer. You can get prequalified with multiple lenders, but you should verify they are only performing a soft inquiry. While there is a rate shopping window of 14 to 45 days that allows you to apply with multiple lenders and choose the best loan, multiple hard inquiries spread out over a longer period can be a problem for your credit rating.

Consider your eligibility.

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

  • Credit history: As with all loans, home improvement lenders prefer borrowers with a history of paying their debts consistently and on time. A FICO credit score of 620 or higher may be needed to be approved for a home improvement loan. However, there are lenders that offer home equity and personal loans that will accept borrowers with lower credit scores, some as low as 580. Interest rates tend to be higher the lower your credit score is.
  • It’s a good idea to review your credit report and know your score before you apply for a home improvement loan. Work on paying down existing debt, especially on any delinquent accounts. Check for errors on your credit report and work with credit reporting agencies to correct and remove the errors if necessary.
  • Loan-to-value ratio: Although personal loan lenders don’t typically take loan-to-value into consideration, this ratio is important for home equity loans. In general, the lower your loan-to-value ratio, the better your terms.
  • Debt-to-income ratio: Both home equity and personal loan lenders consider your debt-to-income ratio when making lending decisions. Your debt-to-income ratio is all of your current monthly debts divided by your monthly gross income. 
  • For example, if you have a monthly before-tax income of $6,000, a $1,500 mortgage payment, $300 car payment and $100 in minimum credit card payments, your ratio would be $1,900 divided by $6,000, or 32 percent. Most home equity lenders stick to the Consumer Financial Protection Bureau’s recommendation to approve debt-to-income ratios no higher than 43 percent, but there is often not a set maximum for personal loans.

Image result for pictures of homes being renovated

How to Choose the Best Home Improvement Lender

It’s important to choose a home improvement lender that aligns with your needs. Nilsen advises homeowners to research local institutions and check with friends or neighbors who have recently done home improvements. Depending on the size of the improvements and options to borrow against existing equity, the best lenders may vary, he says.

There are four key areas you should focus on when choosing a home improvement lender: eligibility requirements, loan amounts, APR and customer satisfaction.

Eligibility Requirements

Some banks charge application fees, so you don’t want to waste time and money applying for a loan that you will not be approved for. Research ahead of time to find a lender’s minimum qualifications. You should only apply with the lenders most likely to grant you the loan.

Loan Amounts

All banks have maximum loan-to-value amounts. Some have minimum and maximum dollar 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 also don’t want to pick one that won’t loan you enough for your purposes.

APR

Consider the interest rates offered by each lender, but keep in mind that not all borrowers will qualify for the lowest published rates. It’s best to get prequalified so you can get a good idea of what your interest rate will be.

When comparing rates, make sure you’re looking at the APR, not just the interest rate. The APR represents the total annual cost of the loan, not just interest, so it’s a better tool to compare lenders. 

A variable APR can offer lower interest in the short term but may be more expensive once rates go up. This type of loan could be a good idea if you’re selling before the interest rate will change, which will allow you to take advantage of the lower rate without paying higher interest after it increases.

Customer Satisfaction

Generally, you can expect the best service from companies with good customer satisfaction ratings. You can research customer experiences with independent ratings resources such as J.D. Power.

J.D. Power offers the U.S. Primary Mortgage Origination Satisfaction Study and the U.S. Retail Banking Satisfaction Study. The studies don’t specifically address home equity loans, but both examine lenders that typically offer home equity loans and measure factors relevant to home equity transactions.

The J.D. Power U.S. Primary Mortgage Origination Satisfaction Study surveys customers and measures their satisfaction in six areas: loan offerings, the application and approval process, interaction, loan closing, onboarding and problem resolution.

The J.D. Power U.S. Retail Banking Satisfaction Study surveys customers and measures their satisfaction in six areas: problem resolution, product offerings, facility, account information, fees and channel activities. 

In both studies, companies are rated on a scale of two to five. Companies with an overall score of five are rated “among the best.” Companies with a four are “better than most,” those with a three are “about average” and those with a two are “the rest.”

Not every lender will be included in the J.D. Power studies, particularly alternative lenders offering personal loans. For companies that aren’t rated by J.D. Power, read reviews in similar categories from the Better Business Bureau and Trustpilot.

The Best Home Improvement Loans of 2018

U.S. News conducted an in-depth review of the leading U.S. mortgage, home equity and home improvement lenders. Only those that offer home equity loans directly to the consumer in at least 15 states were considered, as were alternative personal loan lenders with an online application and availability to most U.S. residents.

Lenders were evaluated based on eligibility requirements, loan limits, APR, fees and customer satisfaction (using J.D. Power’s U.S. Primary Mortgage Origination Satisfaction Study). There is no home improvement loan that is perfect for everyone, so the top performers were recommended based on the strengths in these key areas.

These recommendations are meant to support your research by showing you the company most likely to meet your needs. They are a good starting point for most people, but you should thoroughly research each company. 

Recommendations are divided into two categories: home equity loans and personal loans. These recommendations don’t apply to home equity lines of credit, cash-out refinancing or reverse mortgages, which many of these lenders also offer.

The Best Home Improvement Home Equity Loans

  • Best for relationship perks: CitiMortgage 
  • Best for low minimum FICO credit score: Flagstar Bank
  • Best for high debt-to-income ratio and no maximum loan amount: TD Bank
  • Best for 100 percent loan-to-value ratio and no minimum FICO credit score: Navy Federal Credit Union

Top Lender for Relationship Perks

CitiMortgage

Best Features:
Current customers of Citibank are able to take advantage of more flexible approval requirements than customers without an existing relationship. CitiMortgage accepts current customers with a minimum FICO credit score of 680 or a score of 700 for new customers. There is a maximum loan-to-value ratio of 80 percent for Citi customers or 75 percent for new customers.

If you sign up for the autodeduct feature, you’ll get a 0.25 percent interest rate discount.

Drawbacks:
CitiMortgage has a maximum loan amount of $300,000. Other home equity lenders may have higher limits or have no maximum loan amount as long as other loan criteria are met.

The bank has a J.D. Power overall customer satisfaction rating of two out of five for primary mortgages, which is the lowest rating.

SEE: Dream Home Finder

Best for People Who:

  • Have an existing relationship with Citi
  • Need to borrow at least $25,000
  • Don’t need a loan that exceeds an 80 percent loan-to-value ratio
Highlights:
  • Minimum FICO score: 680 with Citi relationship, 700 without Citi relationship
  • Maximum loan-to-value ratio: 80 percent for Citi customers, 75 percent for new customers 
  • Minimum loan amount: $25,000
  • Maximum loan amount: $300,000
  • Total closing costs: None
  • J.D. Power overall satisfaction rating: Two out of five

Top Lender for Low Minimum FICO Credit Score

Flagstar Bank

Best Features: 
Flagstar Bank offers home equity loans to customers with a FICO credit score as low as 660. There is a 43 percent maximum debt-to-income ratio.

Loans are available for $10,000 to $1 million with a maximum loan-to-value ratio of 89.99 percent.

Drawbacks: 
Closing costs are required for 15-year term loans or loans less than $25,000. Required fees include appraisal, title and recording, and are approximately $750.

Best for People Who:
  • Have a FICO credit score of at least 660
  • Want to borrow as much as $1 million
  • Have a debt-to-income ratio of 43 percent or less
Highlights:
  • Minimum FICO score: 660
  • Maximum loan-to-value ratio: 89.99 percent
  • Minimum loan amount: $10,000
  • Maximum loan amount: $1 million
  • Total closing costs: Required for 15-year term loans or loans less than $25,000; approximately $750 for appraisal, title and recording fees
  • J.D. Power overall satisfaction rating: Three out of five

Top Lender for High Debt-to-Income Ratio and No Maximum Loan Amount

TD Bank

Best Features: 
TD Bank accepts borrowers with debt-to-income ratios as high as 49 percent. Generally, other home equity lenders have a maximum debt-to-income ratio of 40 to 45 percent.

There is no maximum loan amount for home equity loans with TD Bank. You can borrow as much as you need, provided you do not exceed the 49 percent maximum debt-to-income ratio or 80 percent maximum loan-to-value ratio. (You may qualify with a loan-to-value ratio of up to 89.9 percent at a higher APR.)

Drawbacks: 
You’ll need good credit to get a home equity loan with TD Bank. The minimum FICO credit score is 680 for well-qualified borrowers.

There is a closing cost of $99, though many other home equity lenders offer no closing costs.

Best for People Who:
  • Have a FICO credit score of at least 680
  • Have a debt-to-income ratio of 49 percent or less                  Image result for pictures of homes being renovated
  • Need a large home equity loan
Highlights:
  • Minimum FICO score: 680
  • Maximum loan-to-value ratio: 80 percent (89.9 percent available to qualified borrowers at a higher APR)
  • Minimum loan amount: $25,000
  • Maximum loan amount: None
  • Total closing costs: $99
  • J.D. Power overall satisfaction rating: Not rated

Top Lender for 100 Percent Loan-to-Value Ratio and No Minimum FICO Credit Score

Navy Federal Credit Union

Best Features: 
On a fixed-rate home equity loan, you may be eligible to borrow up to a 100 percent loan-to-value ratio. Navy Federal Credit Union does not have a maximum debt-to-income ratio or minimum FICO credit score.

Loan amounts are flexible with Navy Federal Credit Union, with no minimum or maximum loan amount.

Drawbacks: 
Membership in Navy Federal Credit Union is required to obtain a loan. Navy Federal Credit Union membership is generally restricted to active-duty members and veterans of the armed forces, U.S. Department of Defense civilians and their family members.

Best for People Who:
  • Need to borrow up to 100 percent loan-to-value
  • Need flexibility in eligibility requirements
  • Can qualify for Navy Federal Credit Union membership
Highlights:
  • Minimum FICO score: None
  • Maximum loan-to-value ratio: 100 percent for fixed-rate loans
  • Minimum loan amount: None
  • Maximum loan amount: None
  • Total closing costs: None, except for government recording fees, certain fees imposed by condo associations, and the cost for full appraisals or title insurance when these are required
  • J.D. Power overall satisfaction rating: Three out of five

The Best Personal Loans for Home Improvement

  • Best for flexible loan periods and no origination fee: LightStream
  • Best for a high maximum loan amount with variable APR: SoFi
  • Best for short-term loans with co-signer option: Earnest 
  • Best for small loans and flexible eligibility: Upstart
  • Best for small loans with low minimum FICO credit score: LendingClub

Top Lender for Flexible Loan Periods and No Origination Fee

LightStream

Best Features: 
LightStream offers home improvement personal loans with terms ranging from two to 12 years. This is the largest variety of loan periods offered among the personal loan lenders researched by U.S. News.

There is no origination fee and no prepayment fee with LightStream.

Drawbacks: 
LightStream will add 0.5 percent to a loan’s APR when the borrower doesn’t enroll in autopay.

Best for People Who:
  • Need a flexible loan term
  • Don’t want to pay an origination fee or prepayment fee
  • Plan to enroll in autopay
Highlights:
  • Minimum FICO score: 660
  • Co-signers accepted: Yes
  • Alternative eligibility features: No 
  • Minimum loan amount: $5,000
  • Maximum loan amount: $100,000
  • Origination fee: None

Top Lender for High Maximum Loan Amount With Variable APR

SEE: Dream Home Finder

SoFi

Best Features: 
SoFi offers loan amounts from $5,000 to $100,000. Terms are available from three to seven years.

Unlike many other alternative lenders that only offer fixed-rate loans, SoFi has both fixed- and variable-rate loans. This can offer flexibility for borrowers who would benefit from a variable-rate loan.

Drawbacks: 
SoFi doesn’t have a minimum FICO credit score requirement, but the average customer has a credit score of 700 or higher.

Best for People Who:
  • Need a loan of up to $100,000
  • Want a fixed-rate loan
  • Have good credit
Highlights:
  • Minimum FICO score: None, but average is over 700
  • Co-signers accepted: Yes
  • Alternative eligibility features: No
  • Minimum loan amount: $5,000
  • Maximum loan amount: $100,000
  • Origination fee: None

Top Lender for Short-Term Loans With Co-signer Option

Earnest

Best Features: 
Earnest offers loan periods of one to three years with amounts from $2,000 to $50,000. A short-term loan can be beneficial if you want to quickly pay off your home improvement loan.

Co-signers are accepted with Earnest, so you can get help with loan approval if you have a well-qualified co-signer.

Drawbacks: 
Earnest’s one- to three-year loan term may be too short for some borrowers. If you’re borrowing a large amount for home improvements, the payments on a short-term loan may be too high for your budget.

Best for People Who:
  • Have a FICO credit score of at least 660
  • Need to use a co-signer
  • Want a short-term loan
Highlights:
  • Minimum FICO score: 660
  • Co-signers accepted: Yes
  • Alternative eligibility features: Yes, it factors in whether your bank account balances are increasing, whether you’re spending less than what you earn and whether you’re regularly avoiding late or overdraft fees.
  • Minimum loan amount: $2,000
  • Maximum loan amount: $50,000
  • Origination fee: None

Top Lender for Small Loans and Flexible Eligibility

Upstart

Best Features: 
Borrowers can get loans of $1,000 to $50,000 with Upstart, with terms ranging from three to five years. If you only need to borrow a small amount for home improvements, Upstart’s $1,000 minimum can be a good alternative to other lenders that have minimum loan amounts of $2,000 to $5,000.

Upstart accepts borrowers with a minimum FICO credit score of 620, which is lower than most. The lender considers alternative eligibility criteria, including education, area of study and job history.

Drawbacks: 
Although Upstart’s eligibility features are more flexible than most, you’ll have to qualify for the loan on your own because the lender does not accept co-signers.

There are few options for loan terms. You can only choose from three-, four- or five-year loan terms with Upstart.

Best for People Who:
  • Have fair-to-good credit
  • Want to borrow a small amount
  • Can qualify without a co-signer
Highlights:
  • Minimum FICO score: 620
  • Co-signers accepted: No
  • Alternative eligibility features: Yes, considers education, area of study and job history
  • Minimum loan amount: $1,000
  • Maximum loan amount: $50,000
  • Origination fee: Yes, undisclosed

Top Lender for Small Loans With a Low Minimum FICO Credit Score

LendingClub

Best Features: 
LendingClub has a minimum FICO credit score of 600, so borrowers with a fair credit score can still qualify for a loan. However, there is a maximum debt-to-income ratio of 40 percent.

Loans are available from $1,000 to $40,000, so small home improvement loans can be obtained from LendingClub.

Drawbacks: 
LendingClub’s small loan amounts can be good for those who don’t need a large loan, but a maximum loan amount of $40,000 may be too small for some borrowers.

Borrowers will pay a 1 to 6 percent origination fee to obtain a loan.

Best for People Who:
  • Want a small home improvement loan
  • Have fair-to-good credit
  • Have a debt-to-income ratio of 40 percent or less
Highlights:
  • Minimum FICO score: 600
  • Co-signers accepted: Yes
  • Alternative eligibility features: Yes, 180 different factors considered
  • Minimum loan amount: $1,000
  • Maximum loan amount: $40,000
  • Origination fee: 1 to 6 percent

Alternatives to Home Equity and Personal Loans

Home Equity Line of Credit

A type of home equity loan, home equity lines of credit allow you to use the equity in your home as collateral. Unlike a home equity loan, home equity lines of credit are revolving, allowing you to borrow and pay back a certain percentage of your home equity for the full term period. 

Cash-Out Refinancing

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

Government Programs for Home Improvement

Some government programs can help pay for a home remodel. These programs are federally insured, which reduces the lender’s risk, so it may be easier for borrowers to qualify for the loan. The Federal Housing Administration has two programs: 

  • Title I loans
  • Energy Efficient Mortgages

Title I Loans

Under Title I, the U.S. Department of Housing and Urban Development authorizes lenders to make home improvement loans, with HUD backing in case of default.

The maximum loan amount for a single-family home under this program is $25,000. This is less than what’s available with most home equity lenders, which may have no maximum loan amount or a maximum of up to $1 million. 

The interest rate is fixed and generally based on the most common market rate in the area. The rate is determined by the lender and may vary depending on the lender, your credit and market rates.

You can search for a Title I home improvement lender on HUD’s website.

Energy Efficient Mortgages

With the Energy Efficient Mortgage program, homeowners can finance cost-effective energy-efficiency improvements. Qualifying energy-efficient improvements may include solar panels, wall insulation and furnace duct repairs.

Like Title I loans, EEM loans are made by lenders but are federally insured and may be easier to qualify for with government backing. 

Applying for an EEM loan requires a home energy assessment performed by a qualified home energy assessor. Borrowers can choose to make improvements based on the recommendations from the assessor. 

Energy-efficient improvements must be cost-effective to qualify for the EEM, so the cost of making the improvements must be equal to or less than the money saved on energy for the improvements.

Maximum loan amounts are limited to the lesser of 5 percent of the adjusted value, 115 percent of the median area price of a single family dwelling or 150 percent of the national conforming mortgage limit.

Other Home Improvement Assistance Programs

SEE: Dream Home Finder