6 Types of home improvement loans: Which is best for you?

Erik J. Martin
Erik J. Martin
The Mortgage Reports Contributor
November 30, 2022 - 15 min read

What’s the best home improvement loan in 2022?

Home renovations can be expensive. But the good news is that you don’t have to pay out of pocket. Home improvement loans let you finance the cost of upgrades and repairs to your home.

Specialized rehab loans like the FHA 203(k) mortgage exist specifically to finance home improvement projects. And there are also second mortgages — home equity loans and HELOCs — that can provide cash for a home remodel or any other purpose.

So, what is the best loan for home improvements? That depends on your needs. Here’s what you should know.


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1. Home equity loan

A home equity loan (HEL) allows you to borrow against the equity you’ve built up in your home. Your equity is calculated by assessing your home’s value and subtracting the outstanding balance due on your existing mortgage loan.

Unlike a cash-out refinance, a home equity loan does not pay off your existing mortgage. If you already have a mortgage, you’d continue making its monthly payments, while also making payments on your new home equity loan.

When a home equity loan is a good idea

A home equity loan may be the best way to finance your home remodeling projects if:

  • You have plenty of home equity built up
  • You need funds for a big, one-time project

A home equity loan “is dispersed as a single payment upfront. It’s similar to a second mortgage,” says Bruce Ailion, Realtor and real estate attorney.

With a home equity loan, your house is used as collateral. That means lenders can offer lower rates because the loan is secured against the property. The low, fixed interest rate makes a home equity loan a good option if you need to borrow a large sum.

Keep in mind that you’ll likely pay closing costs on a home equity loan, between 2% and 5% of the loan balance. So the amount you’re borrowing needs to make the added cost worth it.

As an added bonus, “a home equity loan or HELOC may also be tax-deductible,” says Doug Leever with Tropical Financial Credit Union, member FDIC. “Check with your CPA or tax advisor to be sure.”

Home equity loan for home improvements: Pros and cons

Home equity loan pros:

  • Home equity loan interest rates are usually fixed
  • Loan terms can last from five to 30 years
  • You can borrow up to 100% of your equity
  • Great for big projects like home remodels

Home equity loan cons:

  • Adds a second monthly loan payment for homeowners that still owe money on their original loans
  • Most banks, lenders, or credit unions charge origination fees and other closing costs
  • Disperses one lump sum, so you’ll need to budget home improvement projects carefully

2. HELOC (home equity line of credit)

A home equity line of credit (HELOC) is another great way to borrow from your home equity without refinancing. A HELOC is similar to a home equity loan, but it works more like a credit card. You can borrow from it up to a preapproved limit, pay it back, and borrow from it again.

Another difference between home equity loans and HELOCs is that HELOC interest rates are adjustable; they can rise and fall over the loan term. But interest is only due on your outstanding HELOC balance — the amount you’ve actually borrowed — and not on the entire line of credit.

At any time, you could borrow only a portion of your maximum loan amount, which means your payments and interest charges would be lower.

When a HELOC is a good idea

A HELOC might be a better option than a home equity loan if you have a few less expensive or longer-term remodeling projects to finance on an ongoing basis.

Other things to note about home equity lines of credit include:

  • Your credit score, income, and home value will determine your maximum HELOC amount
  • HELOCs come with a set loan term, usually between 5 and 20 years
  • Your interest rate and monthly payments can vary over that time period
  • Closing costs are minimal to none

By the end of the term, “the loan must be paid in full. Or the HELOC can convert to an amortizing loan,” says Ailion. “Note that the lender can be permitted to change the terms over the loan’s life. This can reduce the amount you’re able to borrow if, for instance, your credit goes down.”

Still, “HELOCs offer flexibility. You don’t have to pull money out until you need it. And the credit line is available for up to 10 years,” Leever says.

HELOC for home improvement: Pros and cons

HELOC pros:

  • Minimal or no closing costs
  • Payment varies by the amount borrowed
  • Revolving balance means you can re-use the funds after repaying

HELOC cons:

  • Loan rates are often adjustable, meaning your rate and payment can go up
  • You bank can change repayment terms
  • Rates are typically higher than those for home equity loans


3. Cash-out refinance

Another popular way to get money for a home remodeling project is a cash-out refinance. With this option, you refinance to a new mortgage loan with a bigger balance than what you currently owe. Then you pay off your existing mortgage and keep the remaining cash.

The money you receive from a cash-out refinance comes from your home equity. It can be used to fund home improvements, although there are no rules that say cash-out funds must be used for this loan purpose. You can just as easily invest your cash, use it for debt consolidation, or put the lump sum into your bank account.

When a cash-out refinance is a good idea

A cash-out refinance is usually the best home improvement loan when you can lower your mortgage rate along with taking cash out. This only works when current market rates are below your existing rate.

You may also be able to adjust the term length to pay off your home sooner. For example, let’s say you had 20 years left on your 30-year loan. Your cash-out refi could be a 15-year loan, which means you’d be scheduled to pay off your home five years earlier.

So, how do you know if you should use a cash-out refinance? You should compare costs over the life of the loan, including closing costs. That means looking at the total cost of the new loan versus the cost of keeping your current mortgage for its life.

Keep in mind that cash-out refinances have higher closing costs — and they apply to the entire loan amount, not just the cash-back. So you’ll likely need to find an interest rate that’s significantly lower than your current one to make this strategy worth it.

Cash-out refinance for home improvement: Pros and cons

Cash-out refinance pros:

  • You’d continue paying one mortgage payment
  • You can lower your interest rate or loan term at the same time
  • You can spend the cash on anything

Cash-out refinance cons:

  • Closing costs apply to a large loan amount
  • New loan will have a larger balance than your current mortgage
  • Refinancing starts your loan term length over
  • Your mortgage rate could go up if rates have risen

4. FHA 203(k) rehab loan

An FHA 203(k) rehab loan bundles your mortgage and home improvement costs into one loan.

With the FHA 203(k) program, you don’t have to apply for two separate loans or pay closing costs twice. Instead, you finance your home purchase and home improvements at the same time, when you buy the house.

FHA 203(k) rehab loans are great when you’re buying a fixer-upper and know you’ll need funding for home improvement projects right away. These loans are also backed by the government, which means you’ll get special benefits — like a low down payment and the ability to apply with a less-than-perfect credit profile.

On the other hand, this type of loan can take longer to close. “FHA 203(k) loans can be drawn out and difficult to get approved,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. If you go this route, it’s important to choose a lender and loan officer that are familiar with the 203(k) process and can help you through it.

FHA 203(k) home improvement loans: Pros and cons

FHA 203(k) rehab loan pros:

  • Rolls your home purchase and home improvements into one loan
  • Your down payment can be as low as 3.5%
  • Most lenders only require a minimum credit score of 620 (some may go slightly lower)
  • You don’t need to be a first-time home buyer

FHA 203(k) rehab loan cons:

  • Designed only for older and fixer-upper homes
  • FHA loans include upfront and monthly mortgage insurance
  • Renovation costs must be at least $5,000
  • 203k rules limit the use of cash to specific home improvement projects
  • Can take a long time to close the loan

5. Personal loan

If you don’t have enough home equity to borrow from, a personal loan is another way to finance home improvements.

Because a personal loan is unsecured, you won’t use your home as collateral. That means these loans can be obtained much faster than HELOCs or home equity lines of credit. In some cases, you may be able to get loan funding on the next business day or even same-day funding.

Personal loans can have adjustable or fixed rates, but they’re typically much higher than for a home equity loan or HELOC. That said, if you have excellent credit or even just good credit, you can likely get an affordable rate.

The payback period for a personal loan is less flexible, often two to five years. And you’ll likely pay closing costs, too.

Those terms might not sound all that favorable. But personal loans are more accessible than HELOCs or home equity loans for some borrowers. If you don’t have much equity in your home to borrow against, a personal loan can be an option to pay for home renovations.

These loans also make sense to finance emergency home repairs — if your water heater or HVAC system must be replaced immediately, for example. Still, Meyer cautions that personal loans are the “least advisable” option for homeowners.

Personal loans for home improvement: Pros and cons

Personal loan pros:

  • Fast online application process
  • Funds available quickly; possibly on the same business day
  • No lien on your home required
  • Good for emergency home repairs

Personal loan cons:

  • HIgher interest rates than mortgages
  • Lower borrowing limits
  • Shorter loan repayment terms
  • Some have prepayment penalties
  • Loans often have expensive late fees

6. Credit cards

You could always finance some or all of your remodeling cost with plastic, too. This is the quickest and simplest financing option for a home improvement project. After all, you won’t even need to fill out a loan application.

But because home improvements often cost tens of thousands of dollars, you need to be approved for a higher credit limit. Or, you’ll need to use two or more credit cards. Plus, you’ll likely pay interest rates that are much higher than those charged by home improvement loans.

When to use a credit card for home improvements

If you must use a credit card to fund your renovations, try to apply for a card with an introductory 0% annual percentage rate (APR). Some cards offer up to 18 months to pay back the balance at that introductory rate. This approach is only worthwhile if you can pay off your debt within that repayment period.

Like personal loans, credit cards may be acceptable in an emergency. But you shouldn’t use them for long-term financing. Even if you have to use credit cards as a temporary solution, you can get a secured loan later to pay off the cards.

Credit cards for home improvements: Pros and cons

Credit card pros:

  • Quick and easy
  • No paperwork
  • No-interest options available

Credit card cons

  • Annual percentage rates are much higher than other financing options
  • Credit cards limits are often lower than home improvement budgets
  • Steep fees for late payments


What is the best loan for home improvements?

The best home improvement loan will match your specific needs and your unique situation. So let’s narrow down your options with a few questions.

Do you have home equity available?

If so, you can access the lowest rates by borrowing against the equity in your home with a cash-out refinance, a home equity loan, or a home equity line of credit.

Here are a few tips for choosing between a HELOC, home equity loan, or cash-out refi:

  • Can you get a lower interest rate? If so, a cash-out refinance could save money on your current mortgage and your home improvement loan simultaneously
  • Are you doing a big, single project like a home remodel? Consider a simple home equity loan to tap into your equity at a fixed rate
  • Do you have a series of remodeling projects coming up? When you plan to remodel your home room by room or project by project, a home equity line of credit (HELOC) is convenient and worth the higher loan rate compared to a simple home equity loan

Are you buying a fixer-upper?

If so, check out the FHA 203(k) program. This is the only loan on our list that bundles home improvement costs with your home purchase loan. Just be sure to review the guidelines with your loan officer to ensure that you understand the disbursement of fund rules.

Taking out just one mortgage to cover both needs will save you money on closing costs and is ultimately a simpler process.

“The only time I’d recommend the FHA203(k) program is when buying a fixer-upper,” says Meyer. “But I would still advise homeowners to explore other loan options as well.”

Do you need funds immediately?

When you need an emergency home repair and don’t have time for a loan application, you may have to consider a personal loan or even a credit card.

Which is better?

  • Can you get a credit card with an introductory 0% APR? If your credit history is strong enough to qualify you for this type of card, you can use it to finance emergency repairs. But keep in mind that if you’re applying for a new credit card, it can take up to 10 business days to arrive in the mail. Later, before the 0% APR promotion expires, you can get a home equity loan or a personal loan to avoid paying the card’s variable-rate APR
  • Would you prefer an installment loan with a fixed rate? If so, apply for a personal loan, especially if you have excellent credit

Just remember that these options have significantly higher rates than secured loans. So you’ll want to reign in the amount you’re borrowing as much as possible and stay on top of your payments.

How to get a home improvement loan

Getting a home improvement loan is similar to getting a mortgage. You’ll want to compare rates and monthly payments, prepare your financial documentation, and then apply for the loan.

1. Check your finances

Check your credit score and debt-to-income ratio. Lenders use your credit score to establish your creditworthiness. Generally speaking, lower rates go to those with higher credit scores. You’ll also want to understand your debt-to-income ratio (DTI). It tells lenders how much money you can comfortably borrow.

2. Compare lenders and loan types

Gather loan offers from multiple lenders and compare costs and terms with other types of financing. Look for any benefits, such as rate discounts a lender might provide for enrolling in autopay. Also keep an eye out for disadvantages, including minimum loan amounts or expensive late payment fees.

3. Gather your loan documents

Be prepared to verify your income and financial information with documentation. This includes pay stubs, W-2s (or 1099s if you’re self-employed), and bank statements, to name a few.

4. Complete the loan application process

Depending on the lender you choose, you may have a fully online loan application, one that is conducted via phone and email, or even in person at a local branch. In some cases, your mortgage application could be a mix of these options. Your lender will review your application and likely order a home appraisal, depending on the type of loan. Provided your finances are in good shape, you’ll get approved and receive funding.

Home improvement loans and your credit report

Your credit score and report always matter when you’re applying for financing. That’s true for secured loans, like cash-out refinances and HELOCs, as well as personal loans and credit cards.

When you have excellent credit, you improve your chances of getting a lower interest rate — with or without a secured loan. On the other hand, bad credit, or even fair credit, will increase your loan rates significantly for personal loans or credit cards. Some personal loans charge up to 35% APR to less qualified borrowers.

Some unsecured loans also require high origination fees. A few lenders charge up to 6% of the loan amount in fees.

You can always prequalify with online lenders if you’d like an estimate on your loan rates and fees. Prequalification shouldn’t hurt your credit score, and it’ll help you estimate your monthly payments.

Using home equity on non-home expenses

When you do a cash-out refinance, a home equity line of credit, or a home equity loan, you can use the proceeds on anything — even putting the cash into your checking account. You could pay off credit card debt, buy a new car, pay off student loans, or even fund a two-week vacation. But should you?

It’s your money, and you get to decide. But spending home equity on improving your home is often the best idea because you can increase the value of your home. Spending $40,000 on a new kitchen remodel or $20,000 on a new bathroom could add significantly to the value of your home. And that investment would be appreciated along with your home.

That said, if you’re paying tons of interest on credit card debt, using your home equity to pay that off would make sense, too.

Home improvement loans FAQ

What type of loan is best for home improvements?

The best loan for home improvements depends on your finances. If you have a lot of equity in your home, a HELOC or home equity loan might be best. Or, you might use a cash-out refinance for home improvements if you can also lower your interest rate or shorten your current loan term. Those without equity or refinance options might use a personal loan or credit cards to fund home improvements instead.

Should I get a personal loan for home improvements?

That depends. We’d recommend looking at your options for a refinance or home equity-based loan before using a personal loan for home improvements. That’s because interest rates on personal loans are often much higher. But if you don’t have a lot of equity to borrow from, using a personal loan for home improvements might be the right move.

What credit score is needed for a home improvement loan?

The credit score requirements for a home improvement loan depend on the loan type. With an FHA 203(k) rehab loan, you likely need a 620 credit score or higher. Cash-out refinancing typically requires at least 620. If you use a HELOC or home equity loan for home improvements, you’ll need a FICO score of 680-700 or higher. For a personal loan or credit card, aim for a score in the low-to-mid 700s. These have higher interest rates than home improvement loans, but a higher credit score will help lower your rate.

What is the best renovation loan?

If you’re buying a fixer-upper or renovating an older home, the best renovation loan might be the FHA 203(k) mortgage. The 203(k) rehab loan lets you finance (or refinance) the home and renovation costs into a single loan, so you avoid paying double closing costs and interest rates. If your home is newer or higher-value, the best renovation loan is often a cash-out refinance. This lets you tap the equity in your current home — and you could refinance into a lower mortgage rate at the same time.

Is a home improvement loan tax deductible?

Home improvement loans are generally not tax-deductible. However, if you finance your home improvement using a refinance or home equity loan, some of the costs might be tax-deductible.

Disclaimer: The Mortgage Reports does not provide tax advice. Be sure to consult a tax professional for any questions about your taxes.

Shop around for your best home improvement loan

As with anything in life, it pays to compare all your options. So don’t just settle on the first loan offer you find. Compare loan types, rates, and terms carefully to find the best loan for home improvements.