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.

U.S. News conducted an in-depth review of the leading U.S. mortgage, home equity and home improvement lenders. Lenders were evaluated based on product availability, customer service ratings (using J.D. Power’s 2018 U.S. Primary Mortgage Origination Satisfaction Study), qualification requirements and loan terms. 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

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.

A 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% 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%.

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, assuming your home’s value has remained the same. Combined with your first mortgage, a lender typically would allow you to borrow up to 85% of the value of your home, or $212,500 total. After subtracting your mortgage balance, you have $22,500 in available equity left to borrow.

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

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.

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 can include closing costs, late fees and processing fees. Lenders may roll closing costs into the loan balance rather than requiring payment at closing.

Typical closing costs include an origination fee, appraisal, title search and credit repo
rt fee.

Home Equity Loan Advantages

Home Equity Loan Disadvantages

A 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 be up to 30 years.

Personal loans are available for amounts between $1,000 and $100,000.

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 4% to 36%. 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.

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%.

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% 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 Disadvantages

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 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 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, as multiple hard inquiries can ding 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.

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.

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

All home equity loans 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.

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.

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 2018 U.S. Primary Mortgage Origination Satisfaction Study and the 2019 U.S. Personal Loan Satisfaction Study. The studies don’t specifically address home improvement loans, but both rate the customer service of lenders that typically offer improvement loans.

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.

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 during the draw period.

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:

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 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.

Other Home Improvement Assistance Programs