Overall, 91% of U.S. homeowners state that their houses need minor or major renovations, but figuring out how to cover the cost is challenging for many. As a result, not all of them will move forward with projects during any given year. In 2023, U.S. property owners are expected to spend approximately $577 billion on home improvement, but that money won’t all come from savings. Instead, a portion is likely funds from home improvement loans.
A home improvement loan is a convenient and relatively low-cost way to handle expenses related to home repairs, renovations, and updates. If you’re curious about what home improvement loans are and how they work, here’s what you need to know.
What Are Home Improvement Loans For?
Home improvement loans are secured or unsecured loans that fund renovations, updates, and repairs on houses. Most of the financial products traditionally viewed as home improvement loans are secured, using the house itself as collateral. Some examples include a renovation mortgage, a cash-out refinance, a home equity loan, and a home equity line of credit (HELOC).
However, it’s possible to get personal loans that aren’t secured for home improvement loans. Generally, these are harder to qualify for and come with higher interest rates, but they’re a viable option for homeowners who don’t want to make their houses collateral.
How Do Home Improvement Loans Work?
How a home improvement loan works may vary slightly depending on the type. For example, renovation mortgages may come with restrictions that limit how the money is used, ensuring it goes towards updates and repairs. Others may provide more freedom, allowing a homeowner to direct a portion of the funds to another purpose.
Additionally, how the funds are accessed can vary. A home equity loan, cash-out refinance, and personal loan typically provide the homeowner with a lump sum after they’re approved. With a HELOC, homeowners can withdraw money from the approved limit on an as-needed basis, allowing them to keep the balance lower and only pay interest on the cash they genuinely need for the renovations.
In many cases, homeowners owe fees and interest when getting and using home improvement loans. Many of the loan types come with origination or similar administrative fees. Some also have home appraisal expenses and closing costs. However, all will have an associated interest rate and monthly payment requirement.
Is a Home Improvement Loan Right for You?
Generally, home improvement loans are designed specifically for renovations, updates, and repairs, and they come with benefits and drawbacks. Any of the options that use the house as collateral typically come with lower interest rates since they’re secured and might have a longer repayment term. However, there may be restrictions on how the money is used, and there are potentially more fees to navigate.
Unsecured alternatives are often more flexible, but they come with higher interest rates since the house isn’t serving as collateral. Additionally, qualifying is potentially harder, particularly if the borrowed amount is substantial.
Consider where your priorities lie when exploring home improvement loans. That ensures you factor in your needs, making it easier to choose the right solution.
