Home Remodel Loan Options: Guide for Homeowners

Remodeling your home can be pricey, but home remodel loans can help. While there are no specific loans for home remodeling, homeowners have some options to choose from to finance renovations. From home equity loans to cash-out refinance options, understanding your financing choices can help you find the best home improvement loan for your next project.

A home remodel loan or home improvement loan can be any type of financial product that allows you to fund your renovation. There are several types of loans for home improvement, such as home equity loans, home equity line of credit (HELOCs), personal loans, cash-out refinance and FHA rehab loans. These can be offered by banks, credit unions, online lenders and, for FHA rehab loans, the Federal Housing Administration.

Each home improvement loan option may have varying loan amount limits, interest rates, repayment terms and more — which can change depending on the lender’s requirements and your financial history. Likewise, the application requirements between products and lenders will differ.

If approved, you can use your loan to finance a range of activities, such as:

• Repairing your home
• Remodeling a room or several rooms
• Adding a new structure to your home
• Renovating your home
• Replacing systems in your home (electrical, plumbing, etc.)

A home equity loan uses your home's value as collateral, letting you borrow a lump sum equivalent to some of your home’s equity. You can use the loan for a number of reasons — home renovation included. It’s a good option for long-time homeowners who have built significant home equity.

Lenders may offer you up to 80% to 85% of the value of your home. It comes with a fixed interest rate, which makes repayment easier to anticipate. However, the total amount lent to you, along with the loan term, interest rate and other details, will depend on your home’s equity, your financial history and additional financial factors.

Home equity loans also come with various fees, but not all lenders may charge them. You may be asked for an application fee, appraisal fee, notary signing services, title search and insurance or flood certificate, among others.

A home equity line of credit (HELOC) is similar to a home equity loan in that you borrow against your home’s collateral. However, with a HELOC, you only borrow what you need when you need it. It’s similar to a credit card, but you can use your HELOC by writing a check, swiping a debit card tied to the account, or transferring funds to your account.

Taking out a HELOC typically requires you to have at least 15% of your home’s equity. However, there’s no guarantee that you will be granted the maximum equity you’ve earned on your home. Lenders will still evaluate your credit score, debt-to-income (DTI) ratio and other financial factors to determine your loan amount, interest rate and terms. It’s a good option for homeowners who have earned equity in their homes and do not want to take out a lump sum.

With a HELOC, the interest rate is often variable, which means it’s subject to change. Lenders can cap how long you can borrow money, such as five or ten years. Once this period is over, you may be required to pay in full or over time under a repayment period.

Also known as a 203(k) loan, FHA rehabilitation loans offer homebuyers and homeowners the ability to finance home improvement or renovation projects up to $35,000 through their mortgage for a limited 203(k) loan. To get an FHA rehabilitation loan, borrowers must furnish a downpayment of at least 3.5%, making it a good option for borrowers with low credit or who can only afford a small down payment.

There are two types of FHA 203(k) loans: standard and streamlined. Standard 203(k) loans are for extensive repair or substantial structural work, while Streamlined 203(k) loans are for less extensive home improvement projects.

FHA 203(k) loans have fewer eligibility requirements and qualifications than regular mortgages, as they are backed by the Federal Housing Administration. Since the government guarantees and insures the loan, lenders are more willing to take on risk. Additionally, the borrower may choose a fixed-rate mortgage of 15 years or 30 years, or an adjustable-rate mortgage (ARM).

Cash-out refinance takes advantage of the equity you’ve built in your home, allowing you to refinance your existing loan with a larger one to receive extra cash from the lender and repay your initial mortgage. The additional money can be used for almost anything, such as renovations or repairs. It’s a good idea for homeowners who can qualify for a better interest rate if they refinance.

A cash-out refinance can be obtained through banks, the FHA, or the Veterans Administration (VA). Your requirements, interest rate, loan amount, and more can vary depending on the lender.

A personal loan is a lump sum you can borrow from banks, credit unions and online lenders to use for almost any purpose. Home renovation, remodeling and repairs are just a few things you can do with a personal loan. A personal loan may be a good fit if you’ve just bought your home and haven’t built equity yet.

Unlike the other options mentioned above, a personal loan does not rely on your home’s equity. Instead, lenders will determine your loan amount, interest rate and repayment terms based on your creditworthiness, debt-to-income (DTI) ratio and other financial factors. However, you can typically choose between a variable or fixed interest rate, depending on the lender.

Personal loans are repaid monthly, with the amount due stated in your agreement. If you’re late with your payments, you may need to pay a late payment fee. If you fail to repay it entirely, your lender may sue you if your loan is unsecured, or they may take away your collateral if it is secured.

We answer frequently asked questions about home remodel loans to help you find your best option.