The Best Loan for Home Renovation for Every Borrower — 5 Options

Updating your space to restore its structural integrity and modernize its functionality can set you back four to five figures — an amount of cash most don’t have lying around the house. Fortunately, financing options are plentiful. However, the best loan for home renovation for others may not necessarily be the best for you. Discover which type of debt makes the most sense for you.

1. Rehab Loan

Rehab loans exist for fixer-upper buyers. Applying for one means you only need to take out one loan to secure the funds you need to purchase the dilapidated property and bring it up to code. Although you can live in a house in disrepair, it will be uncomfortable and unsafe. Restoring it to a habitable condition is more of a necessity than a luxury.

If you can’t buy a fixer-upper out of pocket, you’ll be hard-pressed to find a third party willing to lend you tens of thousands of dollars, if not hundreds, when the collateral is a run-down house. Most homebuyers are in the market for move-in-ready properties. If you fall into arrears, your lender may struggle to find a taker and recoup their money.

Moreover, taking out a rehab loan is neat because it’s usually challenging. After all, your credit won’t be great after borrowing a large sum to buy a house. It may take years to bring up your FICO and VantageScore scores high enough to bag an additional renovation loan.

Considering home improvement is part of the deal, you must shop around and get estimates from relevant contractors to help justify the amount you need to borrow. Rehab loans are hybrid, so they generally involve more paperwork and take longer to close than typical mortgages.

2. Cash-Out Mortgage Refinance

A cash-out refi is the best loan for home renovation for longtime homeowners who plan to stay put in the long term. This financing option allows you to use your house as an ATM and cash out most of the equity you’ve built on your home over the years.

Cashing out equity in this manner lets you keep your home and spend the funds on renovation — or whatever you want for that matter. While home improvement drives property appreciation more slowly than location, using the proceeds from a cash-out refi on upgrades is like reinvesting in real estate. Increasing your asset’s value benefits your net worth and, by extension, that of your heir in the future since a house represents generational wealth.

Furthermore, refinancing means applying for a new mortgage to replace your current one. If you take this route, you’ll have a larger principal balance to repay again with a fresh term. A new set of closing fees applies too.

Although you reset the clock on your home loan when you refinance, it’s an opportunity to save on interest. You can snag a lower mortgage rate than you currently pay and get a shorter term.

3. Home Equity Loan

Like cash-out refinances, home equity loans enable you to borrow against your house — except you don’t renew your mortgage. Instead, you get a second one.

This option is the best loan for home renovation for you when 80% of your equity is enough to pay for a big-ticket renovation while leaving your existing mortgage alone. It’s subject to amortization immediately, causing the repayment period to kick in once the cash changes hands.

A second mortgage is another property lien. It may outlast your current mortgage, so you won’t be free and clear after paying it out. If you default on your home equity loan, its holder can foreclose on your house to recover what you owe.

Don’t confuse home equity loans with home equity lines of credit (HELOCs). A HELOC also lets you cash out equity without refinancing your mortgage. However, it’s the wiser choice when dealing with multiple, less expensive projects you intend to tackle separately over several years. A HELOC works more like a credit card than a loan, allowing you to maintain a dry powder. You pay only what you use within your limit, and interest applies only to the funds you withdraw.

4. Personal Loan

A personal loan gives you access to funds for home improvement you fancy and amortizes the principal and interest over several years. This financing option can be secured or unsecured, so collateral is optional.

Use an unsecured personal loan you don’t want to borrow against your property and keep your home equity untouched. Approval is usually fast, so you can receive your lump sum and start your project in no time.

A personal loan is also a good option to build a contingency fund. It can help you pay for unplanned or unforeseen expenses that may prolong your renovation.

The downside to using no security is high interest. Credit card companies and payday loan sharks are the only ones charging more than unsecured personal loan lenders. Still, dealing with a higher rate is reasonable when you don’t have to put anything of value at stake. If you don’t keep your end of the bargain, the lender can’t easily take and auction a valuable asset to recover their loss.

Although you may think you have no skin in the game, your unsecured personal loan lender can penalize you and inflate your debt. If that doesn’t work, they may send your account to collections or take legal action against you. Ultimately, your credit will suffer and jeopardize your ability to borrow for whatever purpose in the future.

5. Government-Insured Home Improvement Loan

Government-insured means Uncle Sam would zero out the bill if you don’t fulfill your financial obligation. The Federal Housing Administration, Department of Housing and Urban Development and Department of Agriculture are the usual backers.

Government-insured secured and unsecured loans are viable options to fund a home improvement when most lenders refuse to entertain you because of your creditworthiness. Go in this direction when your credit score or income isn’t high enough to merit a loan approval. Unlike other funding sources, these programs are strictly for home improvement only. Spending a single penny on other things may violate the contract and backfire.

What’s the Best Loan for Home Renovation for You?

Home renovation loans always involve trade-offs. If you can choose from multiple financing options, analyze your situation carefully to determine the most favorable one to maximize your upgrades and minimize your interest.