What's the Best Type of Loan for Home Improvements?
Home improvement referrer Angi’s recent annual survey revealed that 85% of us love our homes.
But that doesn’t mean there’s no room for improvement.
Your lifestyle changes, as do you. You may find that the cute two-bedroom you bought when you first married could use a second bathroom. After ten years with the “good enough” builder-grade cabinets, you’re itching for upgraded storage. Or maybe your hobbies have exceeded your workspace.
And then there are the big home expenses, like new roofs or HVAC systems, that are just part of the pricier maintenance that comes with owning a house. To get the best information about the best home improvement loans available today, we interviewed our own Judy Thompson, VP of Strategic Partnerships at Acorn Finance.
Are you thinking of a home improvement loan?
Thompson says there is no one profile for borrowers, and the best loan for home improvements will depend on your project’s scope and circumstances.
Some people have a high net worth and great credit. They don’t necessarily need a loan to make the home improvements, but they can get a loan at a great rate. This allows them to keep more cash in hand and even potentially increase their balance by investing it.
Comparing options on Acorn Finance? See if you prequalify for a personal loan without impacting your credit score.
Just answer a few questions to get personalized rate estimates from multiple lenders.
On the other end of the spectrum are people who want or need improvements to their home, like a new roof or an HVAC replacement, but don’t have the funds available to cover the project. Still, most people will fall in the middle, with decent credit, but not enough funds to cover a major project.
The loan you need will depend on the scope of your project, as well as the credit you can qualify for. Acorn Finance is a place where you can compare a variety of loans in a single place with one simple application.
Top Home Improvement Projects in 2024
US News & World Report has deemed 2024 “the year of home improvement.” Among the fastest-growing categories are accessory dwelling units (ADUs), guest houses, and garage apartments, with interest surging 43% in the past year. Many homeowners are also looking at ways to make their homes more sustainable, with many drawing on the Investment Tax Credit, a credit that rewards homeowners for improvements like heat pumps and solar panels.
In their State of Spending report, Angi reported that homeowners spent an average of $13,667 on home improvements, maintenance, and emergency repairs in 2023, up 51% from 2019.
Analysts from Angi say the jump is, in part, because people spent a lot of time in their homes during the COVID-19 lockdowns. Shortages slowed a lot of projects down, but now people are ready to handle heavy maintenance projects and take on improvements that will help their homes grow with them.
One of the most expensive repairs is likely a new HVAC system.
“If you have high power bills, less efficiency, and constant nickel and diming, that can be a sign your HVAC system needs to be replaced,” says James Bradshaw, an HVAC expert from Collins Commercial Services. “When high heating and AC bills are killing you, and you find your system isn’t doing its job anymore, a new HVAC system can be just the relief you need.”
|
$5,000-100,000
Loan Amount
|
6.99-25.49%
APR
|
2–12 years
Terms
|
660
Minimum Credit Score
|
Disclaimer
*Your loan terms, including APR, may differ based on loan purpose, amount, term length, and your credit profile. Rate is quoted with AutoPay discount. AutoPay discount is only available when selected prior to loan funding. Rates without AutoPay are 0.50% points higher. To obtain a loan, you must complete an application on LightStream.com which may affect your credit score. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice. Payment example: Monthly payments for a $25,000 loan at 10.19% APR with a term of 12 years would result in 144 monthly payments of $301.52.
Truist Bank is an Equal Housing Lender. ©️ 2023 Truist Financial Corporation. Truist, LightStream, and the LightStream logo are service marks of Truist Financial Corporation. All other trademarks are the property of their respective owners. Lending services provided by Truist Bank.
Of course, once you’ve fallen in love with the idea of an update, you need to find the best way to pay for it. No one answer is the best fit for every improvement and every borrower. These are some options to explore on your hunt for the best rates for home improvement loans.
Home equity loans
Every month, when you pay your mortgage, you increase your equity in the home. This equity can be used as an asset to secure a loan. This kind of loan is often called a second mortgage.
These can be attractive loans for home improvements because you get all the funds in a lump sum, allowing you to pay for bigger projects. The monthly payments and interest rates are fixed, so you can predict the cost every month. One potential pitfall is that you will need to know how much you need for your home improvement project. If you need additional funds, you must take out another loan.
“They are a great option for a larger home improvement project,” Thompson says. “They can have a quick turnaround, and the rates are usually pretty competitive.”
Home equity lines of credit (HELOCs)
A home equity line of credit is similar to a home equity loan in that the value is based on the equity you have in your home. A HELOC, however, is a line of credit you can draw on as needed instead of taking the loan as a simple lump sum payment. While this can give you additional flexibility, it can also mean higher payments if interest rates increase.
[box-tips content=”Many homeowners love HELOCs because of their flexibility. You can take out $10,000 now for a new HVAC system and $2,000 later for a new water heater — you don’t need to have your entire project in mind. However, because the rates and conditions for the HELOC could change over time, HELOCs can also be vulnerable.”]
Mortgage refinancing
Many people consider refinancing a mortgage when they feel they can get a lower interest rate. This is different from a home equity loan in that it is based on the principal balance of your mortgage rather than the equity you already have in the home.
This type of loan typically has lower interest rates and is paid over a longer term than other loans. Lenders will look at your loan-to-value ratio when deciding whether to approve a refinance of your loan. Freddie Mac says, in general, you’ll need at least 20% equity in your home to qualify for refinancing.
Personal loans
A personal loan can be one of the more flexible options for funding a home improvement project. “Unsecured loans require no collateral,” Thompson says. “They can be closed-end with a defined term to them, or open-ended options like credit cards or digital lines of credit.”
How much you qualify for will depend on your credit history, income, and other factors. One of the benefits of a personal loan is that you do not have to put up collateral to qualify. However, some people may find they will pay a higher interest rate for a personal loan than for a secured loan like a home equity loan.
Government loan
The US Department of Housing and Urban Development (HUD) offers several loans that can be used for home improvements. Loans have different purposes and different qualifying conditions and are handled through HUD-approved lenders. The FHA Title I Property Improvement Loan, for instance, is a loan geared toward people with limited home equity. There are also loans geared toward people with low income who are unable to obtain affordable credit through other venues.
The loans can be used to improve, repair, or modernize homes or remediate health and safety hazards. However, income and equity limits make these loans unavailable to all borrowers.
Credit cards
A credit card you already have can be a tempting choice for paying for home improvements. If you are DIYing the job, you can pay for each project component as it comes along.
But, most credit cards don’t have high enough limits to cover major projects. If you have a $20,000 roof replacement coming up, you’ll probably be hard-pressed to put it on your American Express card.
This is also typically one of the most expensive forms of credit, with average interest rates hitting 24.62% in June 2024.
Finding the right home improvement loan for you
“What’s the right fit depends on how much you need and how much time you need to pay it,” Thompson says. “A lot of it is about how it fits into your monthly budget.”
When you dream of home improvements, start with a general idea of what you want to accomplish and average costs for projects like that in your area. Once you have this starting point, you can start considering your options. Think about how much you want to pay monthly on a loan and how long you want to spend paying off the improvement.
At Acorn Finance, we make it easy to compare your options and choose the best loan for your project. You can fill out a single application and then compare offers from multiple lenders. Ready to get more space in your kitchen, more light in the bathroom, or a crisp and cool new HVAC system? Start mapping out a path to paying for your home’s glow-up today.
Comparing options on Acorn Finance? See if you prequalify for a personal loan without impacting your credit score.
Just answer a few questions to get personalized rate estimates from multiple lenders.
Lara Manetta is a freelance writer based in Florida. She’s written extensively about local and national real estate trends, including a book for doctors interested in real estate investing. When she’s not writing, you can find her kayaking, reading, or sailing.
acornfinance.com