Is a personal loan for home improvement the right choice?

Sooner or later, odds are your home is going to need to have some work done. It could be as simple as a fresh coat of paint on the walls or a new door, or it could be as intensive as a new roof or a bathroom remodel.

Whatever the scope, a home improvement project is rarely cheap. Fortunately, there are multiple ways to help finance your improvements, including personal loans. But is taking out a personal loan the best option for your home improvement needs?

In this article, Rocket Loans breaks down just how a personal loan stacks up against some common options for financing home improvement. We'll also tell you what you need to know to find the option that's right for you.   

Understanding The Cost Of Home Improvement

Before you start shopping for a loan, it's important to first understand just what you're getting into with your home improvement project. Knowing how much you intend to spend is essential when searching for the best financing option.

Home improvement costs depend on a host of factors: which room you're working on, the scope of the renovations, the quality (mid-range or upscale) of upgrades and more. According to the Remodeling 2024 Cost vs. Value Report, for instance, Americans are now spend an average of $2,355 for a front door replacement. Vinyl window replacements, on the other hand, this year have an average cost of $21,264, while a bathroom remodel ranges from $25,251 (mid-range) to $78,840 (upscale). At the highest end, an upscale master suite addition now costs an average of $339,513.

Prices fluctuate from year to year as well. For instance, the average cost of an upscale master suite addition in 2023 was $325,504, according to the Remodeling 2023 Cost vs. Value Report. Compare that to the 2024 report and you can see a difference of more than $14,000. It goes to show how important a factor time is when planning your renovations. What looks like an affordable project this year could become significantly more expensive if put off until the next year.   

Make sure you do your homework so that you have a firm grasp on how much you'll need to spend to achieve your home improvement goals. Once you have that figured out, it's time to take a look at the types of financing options that are available to you.  

What Is A Home Improvement Personal Loan?

A home improvement personal loan is a type of personal loan dispensed specifically for funding renovations, repairs and improvements. It can be applied to any type of home improvement project, and, while the exact terms and conditions typically vary, they all share some common attributes:

• No collateral required. Home improvement personal loans, like all personal loans, are unsecured, meaning they don't require any collateral. Instead, the lender will base their approval process on a number of factors, such as your credit score, employment status and debt-to-income ratio.
• Fast funding. Once approved, you could see your home improvement personal loan deposited into your account in as little as 1 to 3 business days. The approval process is also less complicated than other financing options. At Rocket Loans, for instance, the approval process requires basic information like your name, address and income.
• Fixed APR and monthly payments. With a home improvement personal loan, you can expect a fixed annual percentage rate (APR) as well as fixed monthly payments. That means you'll know up-front how much the loan will cost you, making it easier to budget accordingly. However, because it's an unsecured loan, interest rates may be higher than if you'd use your home as collateral.

Is Getting A Personal Loan For Home Improvement The Right Choice?

If you're planning a home renovation project in the near future, a home improvement personal loan could be the best way to finance it. A home improvement personal loan can range from $1,000 to $100,000 and doesn't require home equity or the use of your home as collateral. This means that even new homeowners can get the funds for their project, and there's no risk of losing your home to lenders if things take a turn for the worse and you're unable to repay what you borrowed.

Of course, no collateral means that a home improvement personal loan is unsecured, which often translates to higher interest rates. It also means that lenders will pay much more attention to factors like your credit score, income and debt-to-income ratio during the approval process. If you do have good credit, though, then the process is simple. You may not be required to provide anything more complicated than proof of income and employment, and you could have the funds deposited into your bank account within 3 days.

Other Financing Options For Home Improvement

A home improvement personal loan isn't the only route to covering the cost of your projects. Depending on your financial situation and specific renovation needs, you might want to consider some of the other funding avenues available. Let's take a look at a few of the most common financing options:

Home Equity Loan

A home equity loan allows you to borrow a lump sum of cash worth a certain amount, usually up to 85% of your home's equity. If you're a long-time homeowner with lots of equity built up, then a home equity loan could easily cover the cost of renovations. If you're a new homeowner with relatively little equity, however, then the amount that you are able to borrow will be limited.

These types of loans have a fixed interest rate over a long repayment period, between 5 to 30 years. Compare that with the 2 to 7 years of a home improvement personal loan. This means your monthly payments, spread out over a longer period of time, could be quite low and more manageable.

One additional benefit of home equity loans (and HELOCs – see below) is that the interest on them can be tax deductible. The 2017 Tax Cuts and Jobs Act rolled back a number of deductions available and introduced a number of new limitations. Included in this was a new limit on itemized deductions for state and local taxes.

According to a 2018 memo from the IRS, though, home loan interest can still be deducted if the loan funds are used to "build or substantially improve" a home or property that has been used to secure said loan. This means that interest on home equity loans, unlike home improvement personal loans, is still tax deductible when the loan is used for home improvement purposes. As always, you should consult a tax professional regarding your specific circumstances.

Unlike a personal loan, however, home equity loans are still secured with your home as collateral. So, if you default on repayment, you could end up losing the very home you're trying to improve. Home equity loans also include fees that you won't see with a personal loan. These include closing costs, which can be as high as the original closing costs for your mortgage. Add to that the interest, and the true cost of the loan can quickly stack up.

HELOC

A home equity line of credit, or HELOC, is similar to a home equity loan in that it is based on the accrued equity of your home. It differs, however, in that it's more like a credit card than a traditional loan. Rather than a lump sum, the lender gives you a line of credit that can be drawn upon during a set period of time – usually 10 years. Once that period of time is up, you enter repayment and are responsible for the amount you borrowed plus interest.

HELOCs typically have adjustable interest rates, meaning it's harder to know the total cost of the loan beforehand. Rates are usually lower than a personal loan, however. As a secured loan, opening a HELOC means your home will be put up for collateral. Like a home equity loan, if you are unable to make your payments, you forfeit your house.

FHA Title 1 Loan

An FHA Title 1 Loan is a unique home renovation loan that is offered by a traditional lender, such as a bank, and is insured by the Federal Housing Administration (FHA). Because it's being backed by a federal guarantee, lenders will usually offer lower rates on an FHA Title 1 Loan than they would on a personal loan. You also won't need to front any collateral if the loan is $7,500 or less. Approval is based on income, payment history and outstanding debts. Lenders offering FHA Title 1 Loans don't look at your credit score.

However, an FHA Title 1 Loan has more restrictions than other types of home improvement personal loans. For a single-family home, the loan amount is capped at $25,000. A Title 1 Loan can also only be used for a specific type of improvement: one that is permanent and makes your home more livable and/or energy-efficient. That means you likely won't qualify if you're trying to add a deck or finance a swimming pool.

Alternative Ways To Pay For Home Improvements

A loan isn't the only way to cover the cost of your home improvement project. Depending on your financial needs and the nature of your renovations, here are a few other options to consider:

• Cash. If paying for your project in cash is feasible, then consider saving up to do so. It might take longer to get the renovations done, but you'll be able to do so without going into debt. Consider opening a special savings account for the project.
• Mortgage refinance. With a cash-out mortgage refinance, you can refinance your existing mortgage into a higher amount. The difference between the old and new mortgage is then given to you as a lump sum, which you can use to fund your renovations. Of course, be sure you can afford the new mortgage before taking this option.
• Energy Efficient Mortgage. The Energy Efficient Mortgage (EEM) Program is another option offered by the Federal Housing Administration to help homeowners pay for renovations. Unlike a Title 1 Loan, an EEM is designed specifically to help the borrower make their home more energy-efficient and lower their energy bills. Qualifying for an EEM means meeting a narrower set of requirements.
• Credit card. Some lenders offer credit cards with 0% interest introductory periods – meaning you pay no interest on purchases so long as you pay back the full sum within the grace period. This could let you pay for home improvements at a lower cost than with a loan, but only if you're able to repay the full sum in time. Unexpected developments in your renovations could also make it harder to repay the amount before the grace period ends.

Build The Home Of Your Dreams

Few homeowners make it through the life of their home without tackling some renovations or improvements. Whether they're emergency fixes or luxury expansions, odds are you'll one day find yourself in the same situation. When you do, consider carefully how you're going to pay for it.

If you don't want to put up your home as collateral, then a home improvement personal loan could be your best option.