A renovation loan can be worth it if it will help you improve the value and livability of your home without costing too much. If you want a loan with quick funding that doesn’t require you to use your home as collateral, getting a personal loan for renovations could be a good decision.
How worthwhile a renovation loan proves to be depends in part on which type of renovation loan you choose because interest rates and approval requirements can vary. Common types of renovation loans include home equity loans and unsecured personal loans. Home equity loans are secured loans that use the equity in your home to determine how much you can borrow. The amount you can borrow with an unsecured personal loan is typically determined by factors such as your credit score, income and existing debt.
When Is a Renovation Loan a Good Idea?
When it is going to increase the value of your home
A renovation loan can be worth it if you plan on selling the home and a renovation would increase its value.
When it is going to save you money in the long run
If you’re doing a renovation to repair something in your home, it may be worth it if the problem would otherwise persist and cause you to spend more money in the long run.
When you can get a good rate
A renovation loan will be worth it if you can get a good interest rate compared to other borrowing options. This goes hand in hand with saving money in the long run because interest will accrue over the life of the loan.
When you have enough equity in your home
For home equity loans, the equity you have in your home will determine how much you can borrow. A home equity loan could be worth it if the equity you have in your home allows you to borrow enough for your renovations.
When you are confident you can pay the loan off
A renovation loan is only worth it if you know you can afford it. Your debt-to-income (DTI) ratio is a good indicator of your ability to afford a loan, and most lenders will typically require a DTI of less than 43% or so.
When you have a good enough credit score
If you have a credit score of 680 or higher, you should have a good shot at qualifying for most renovation loans, but you may not qualify for the best rates. The higher your credit score is, the better your loan terms will be. If your credit score is good enough to get you a low rate, a renovation loan could be worth it.
Alternatives to a renovation loan include doing a cash-out refinance for your home loan or getting a credit card with a 0% introductory APR. Just keep in mind that after the introductory period ends, credit cards typically have higher rates compared to renovation loans.
This answer was last updated on 01/17/24 and it was first published on 04/11/23. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.
FAQs
Interest Rates: Personal loans typically have higher interest rates compared to other types of loans secured by collateral, such as home equity loans or cash-out refinancing. The average interest rate for a home renovation personal loan is around 25%.
What credit score do you need to get a renovation loan? ›
As with a regular FHA Loan, an FHA 203(k) Home Renovation Loan has a minimum FICO® credit score requirement of 620.
Is it better to finance renovations or pay cash? ›
The lowest-cost option for your home renovations will always be paying cash. It saves money on accruing interest, requires no collateral, and won't impact your credit score. Unless you are independently wealthy, saving for your home improvement project may take some time, but that gives you more time to plan.
What is the longest term for a home improvement loan? ›
What is the average length of a home improvement loan? ›
The typical term length for a home improvement loan varies depending on the type of loan and the lender. For home equity loans, the term is usually 5 to 30 years, while for personal loans, it is typically 2 to 5 years.
What type of loan is best for a home addition? ›
A home equity loan is a very helpful and lower-cost option if you're looking to fund home improvement projects. This loan allows you to tap into the equity that you've built up in your home without refinancing your current loan. You may also hear this form of home improvement loan referred to as a second mortgage.
What is the interest rate on a 203k loan? ›
What does an FHA 203K loan cover? ›
Limited 203(k) Mortgage
Permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home. Homebuyers and homeowners can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an FHA appraiser.
Can a mortgage loan be used for renovations? ›
An open-end mortgage can help buyers purchase a fixer-upper while also providing the money to fund renovations and repairs. If an open-end loan isn't available in your state, you can always get a traditional mortgage, explore different government-backed loan programs or check out your loan refinancing options.
What does Dave Ramsey say about home renovations? ›
Home renovations can be a big expense on top of the other costs of owning a home. Ramsey suggests doing one project at a time, saving up for repairs, doing the work yourself when you can, and bartering for repairs.
You don't want to spend more than 10 to 15 percent of your home's value on a single room. If you spend more, the value of the renovation will not proportionally add to the value of your home. For example, if your home is worth $100,000, the maximum you should spend on a kitchen or bathroom renovation is $15,000.
What to do if you run out of money during renovation? ›
So, here's what to do when you run out of cash during a home improvement project.
- Prioritise and postpone incomplete work. ...
- Speak directly to a subcontractor. ...
- Fund unfinished remodeling projects.
The monthly payment on a $50,000 loan ranges from $683 to $5,023, depending on the APR and how long the loan lasts. For example, if you take out a $50,000 loan for one year with an APR of 36%, your monthly payment will be $5,023.
What is the APR on a home improvement loan? ›
With an unsecured home improvement loan, borrow funds without using your home as collateral. Repay a personal loan in terms of 12-84 months. Rates range from 7.49% to 24.99% Annual Percentage Rate (APR) 6, which includes a relationship discount of 0.25%.
How long should I fix my home loan rate for? ›
The main advantage of a fixed rate home loan is certainty. You can lock in or 'fix' your interest rate for a certain period of time – typically between one and five years – and plan for the future, knowing that your repayments will stay the same during that time.
Are construction loan rates higher than mortgage rates? ›
Construction loan rates are also typically higher than traditional mortgage rates. That's partially because they're unsecured (backed by an asset). With a traditional mortgage, your home acts as collateral — if you default on your payments, the lender can seize your home.
Does loan modification increase interest rate? ›
The modification typically results in a reduced monthly principal and interest payment, but overall interest paid on the loan will increase (given the extension of the loan term). The servicer must ensure the borrower's monthly mortgage loan payments, including trial period payments, include an escrow payment.
