Home Improvement Loans

Home improvement loans are designed for smaller-scale projects, such as installing new windows and cabinets or replacing HVAC systems. To fund a home improvement project, homeowners can explore various financing options, such as home equity loans, personal loans, cash-out refinancing, and home equity lines of credit. 

When applying for a traditional home improvement loan, lenders typically use your home’s current market value to determine the loan amount. The value of your home, less your mortgage balance, is the loan amount you can take out for your project. If you have enough equity, a traditional loan may help finance your entire project. 

One major drawback of using a traditional loan is that it may force you to scale back on your plans, limiting your ability to execute your vision. Homeowners with limited equity may end up compromising on certain elements. 

That’s where RenoFi comes in — a financing platform designed to help homeowners take on extensive renovations, not just smaller-scale projects. Unlike conventional loans, RenoFi determines borrowing power by using your home’s after-renovation value, allowing you to borrow a larger amount. This means you can dream big because you have access to more funds. 

What Are Home Improvement Loans?

Unlike a home renovation, home improvements are smaller-scale projects that typically cost between $20,000 and $60,000.

Homeowners can consider two primary loan types to fund their smaller-scale projects: secured and unsecured. 

Secured loans, which include HELOCs, home equity loans, and cash-out refinance, use your home as collateral. While this may provide you with better loan terms (lower interest rates), you also risk foreclosure if you default on payments. 

Unsecured loans are ideal for homeowners who don’t want to put their homes at risk. However, an unsecured loan, such as a personal loan, often has higher interest rates and shorter repayment terms, which can increase monthly payments.

Active military personnel can also take out a VA loan to fund their projects, and some homeowners may also qualify for USDA loans and FHA 203(k) loans.

Regardless of the type of loan, lenders use the home’s current market value to calculate the loan amount. You may not fully cover the cost if you have limited equity. Additionally, taking out a traditional home improvement loan can restrict your vision. 

RenoFi, on the other hand, uses your home’s after-renovation value, significantly increasing your loan amount. Explore RenoFi to increase your borrowing power; it may also encourage you to take on a more extensive renovation and increase your home’s resale value. 

Common Types of Home Improvement Loans

1. Home Equity Loans

With a traditional home equity loan, homeowners can borrow against their equity to fund home improvement projects. To calculate the equity, lenders take up to 80% of your home’s current value and deduct your mortgage balance. 

A home equity loan gives homeowners a lump sum that they repay with fixed interest rates. However, this loan type may not be ideal, especially if you haven’t built up your home’s equity. 

To illustrate, assuming you bought a new home worth $600,000 and the cost of your home improvement plan is $60,000:

• Home Price: $600,000
• Down payment (20%): $120,000
• Current Mortgage Amount: $480,000

Here is how much you can take out for the home equity loan when purchasing a home for $600,000. 

• Home Price: $600,000
• Current Mortgage Balance: $480,000
• Example Home Equity Loan % of Home Price: 80%
• Example Home Equity Loan Amount: $600,000 * 80% = $480,000 (80% of Total Home Value)
• $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Loan Amount)

When using traditional home equity, you would be unable to finance your home improvement project. In this example, a conventional home equity loan isn’t the best option. 

In another scenario, let’s assume you have already paid 10% of your mortgage:

• Home Price: $600,000
• Current Mortgage Balance: $420,000 (because you’ve paid 10%)
• Example Home Equity Loan % of Home Price: 80%
• Example Home Equity Loan Amount: $600,000 * 80% = $480,000 (80% of Total Home Value)
• $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)

Only after you have paid 10% of your mortgage can you take out a $60,000 loan. While this amount is likely enough to fully cover your home improvement project cost, consider that expected expenses might come up. 

2. RenoFi Home Equity Loan

Unlike conventional loan types, RenoFi calculates the loan amount using your home’s after-renovation value. This allows you to pursue a more extensive renovation project that can increase your home’s resale value. You won’t have to stick with smaller home improvement projects. You can essentially tackle your entire wishlist.

For example, if your new plan for renovations adds $150,000 to your home’s value (the current value is $600,000), RenoFi will calculate your loan amount using $750,000 (the post-renovation value). 

To illustrate:

• After Renovation Value of Your Home: $750,000
• RenoFi Amount: $750,000 * 90% = $675,000 (90% of Total Home Value)
• $675,000 - $480,000 = $195,000 (RenoFi Home Equity Loan Amount)

Instead of zero equity, you can now borrow up to $195,000 for your projects. 

Without RenoFi loans, it may not be possible to fund your project using a traditional home equity loan. RenoFi helps homeowners plan better renovations for their homes by providing them with the best possible loan options using their home’s future value. Compared to conventional loans, you can borrow up to 11x more with a RenoFi loan. 

If you have paid out 10% of your mortgage and plan to do more upgrades for your home, here is how much you can get with a RenoFi home equity loan. 

Assuming the post-renovation value of your home is $750,000:

• Post-renovation Value of Your Home: $750,000
• RenoFi Loan Amount: $750,000 * 90% = $675,000 (90% of Total Home Value)
• $675,000 - $420,000 = $255,000 (RenoFi Home Equity Loan Amount)

You don’t have to limit your renovation plans. With RenoFi, it’s possible to plan a more extensive renovation project to increase the resale value of your home. 

Make sure you work with a contractor to develop a renovation plan and cost estimate. This information is essential for the home appraisal and underwriting process.

In addition, RenoFi loans also offer:

• No draw periods
• No need to give up your current loan
• No inspections

3. Home Equity Lines of Credit (HELOC)

A HELOC is a secured loan in which the homeowner uses the home as collateral. It’s like a credit card, where you’re given a pre-approved limit (your equity), making this type of loan ideal for ongoing renovations. 

Here is how much you can take out with HELOC using the same example above:

• $600,000 * 80% = $480,000 (80% of Total Home Value)
• $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Line of Credit)

You cannot fund your project as you haven’t built up your equity yet. 

If you’ve paid 10% of your mortgage, this is how much you can get:

• Home Price: $600,000
• Current Mortgage Balance: $420,000
• Example Home Equity Line of Credit % of Home Price: 80%
• Example Home Equity Line of Credit Amount: $600,000 * 80% = $480,000 (80% of Total Home Value)
• $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Line of Credit)

You can only take out $60,000 after paying 10% of your loan using a traditional home equity line of credit. True, this can fund your project, but consider other fees that might come up. 

4. RenoFi Home Equity Line of Credit

Unlike a traditional HELOC, RenoFi uses your home’s future renovation value to calculate your loan. This means you can borrow more.  

Renofi HELOC:

• After Renovation Value of Your Home: $750,000
• RenoFi Amount: $750,000 * 90% = $675,000 (90% of Total Home Value)
• $675,000 - $480,000 = $195,000 (RenoFi Home Equity Line of Credit)

With the help of RenoFi, homeowners can increase the borrowing amount and plan for more extensive renovations that increase the resale value of the home. 

5. Cash-Out Refinancing

Cash-out refinancing replaces your current mortgage and uses your home as collateral. Unlike HELOC and home equity loans, a cash-out refinance is a brand-new loan, not a second loan. Also, you will likely have different interest rates. 

Using the same example above, here is how much you can take out with a cash-out refinance loan on a new home purchase.

• $600,000 * 80% = $480,000 (80% of Total Home Value)
• $480,000 - $480,000 (Current Mortgage Balance) = $0 (Cash Out Refinance Amount)

If you haven’t built up equity yet, financing your home improvement project using a cash-out refinance may not be possible unless you have more funding sources.

However, if you’ve paid 10% of your mortgage, reducing your balance to $420,000, here is how much you can get with a cash-out refinance. 

• $600,000 * 80% = $480,000 (80% of Total Home Value)
• $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Cash Out Refinance Amount)

Only after paying 10% of your mortgage can you take out a $60,000 loan to fund your project. 

6. RenoFi Cash-Out Refinance

Using your home’s post-renovation value, you can finance your home improvement project with Renofi.  

RenoFi Loan Amount: 

• $750,000 * 90% = $675,000 (90% of Total Home Value)
• $675,000 - $480,000 = $195,000 (RenoFi Cash Out Refinance Amount)

It’s possible to also plan for a more extensive renovation if you have already paid 10% of your mortgage. Here is how much you can get with a RenoFi cash-out refinance:

• After Renovation Value of Your Home: $750,000
• RenoFi Loan Amount: 
• $750,000 * 90% = $675,000 (90% of Total Home Value)
• $675,000 - $420,000 = $255,000 (RenoFi Cash Out Refinance Amount)

In this scenario, you can still borrow a substantial amount with RenoFi to cover your home improvement projects or an extensive renovation.

7. Personal Loans

Some homeowners may prefer an unsecured loan without using their home as collateral. In this case, they can apply for a personal loan. The loan offers a lump sum at a fixed interest rate, which is usually higher.

Personal loans are ideal for home improvements or smaller-scale projects, but you need a good credit score to qualify. Lenders will have different eligibility requirements for this type of loan. 

RenoFi loans include personal loans for up to $100,000, payable in 20 years. You can talk to a RenoFi Advisor to understand what lenders offering Renofi loans require for eligibility. Most lenders usually require a credit score of at least 640 to qualify for a loan. 

RenoFi vs. Traditional Home Improvement Loan Options

Traditional home improvement and renovation loans require homeowners to have substantial equity, a good credit score, and consistent income to qualify. These loans may be accessible and common but have specific limitations and trade-offs. 

For example, a traditional home equity loan or HELOC may not be ideal if you haven’t built up a significant amount of equity. Those who can borrow but have limited equity may not be able to fund their home improvement projects fully. Choosing to refinance could also mean paying higher interest rates.

RenoFi, a renovation financing platform, helps homeowners acquire substantial loans for their home improvement or home renovation projects. Using your home’s post-renovation value, you can borrow 11x more with a RenoFi loan than a traditional home equity loan or HELOC. 

With RenoFi, you can take out a loan based on your home’s future potential, not its current equity. This means you don’t have to limit your renovation plans. If you can pay, taking out a RenoFi loan can help boost the resale value of your home. 

Key Features of RenoFi Loans

With RenoFi, there’s no need to finance your existing mortgage. Because the post-renovation value of your home is used in determining the loan amount, taking out a RenoFi loan gives you greater borrowing power than a traditional home improvement loan. 

Part of the application process is renovation underwriting. RenoFi conducts contractor due diligence and a project feasibility study to determine eligibility for every loan. You’ll need to provide RenoFi with references and documents to ensure you qualify. 

Traditional Home Renovation Loan Example vs RenoFi

Traditional Loan Example:

A homeowner plans to renovate their kitchen for $80,000, but their equity is limited. They can only borrow 80% of the home’s current market value, less the mortgage balance. Because of the limited funds, they can either scale back their project or seek additional funding. 

RenoFi Loan Example:

The same homeowner submits a renovation plan showing how the kitchen remodel increases the home’s value. Using RenoFi, the homeowner can borrow up to 90% of the home’s after-renovation value or 125% of its current value, significantly increasing the loan amount. The homeowner will have enough funds to finance the project and plan a more extensive renovation.

To determine borrowing power, RenoFi does two calculations and picks the lower amount. Here is an example: 

Using 125% LTV of the current home value 
(current home value x 125%) - mortgage balance 
(600,000 x 125%) - 400,000  = 750,000 - 400,000 = 300,000 

Using 90% LTV of the ARV (after-renovation value)
(ARV x 90%) - mortgage balance 
(1,000,000 x 90%) - 400,000 = 900,000 - 400,000 = 500,000 

The lesser of 125% LTV or 90% ARV LTV is 300,000.

How to Choose the Right Home Improvement Loans

• Understand your borrowing power and options: Once you have this information, you can adjust your project scope. 
• Assess your financial situation: Calculate your regular and irregular income and monthly expenses. If you plan to take out a larger loan, consider cutting back. If you have savings, see if you can allocate some of them to your home improvement plans. 
• Equity available in the home: You can calculate your home’s equity using the home’s current market value minus your mortgage balance. With RenoFi, you can use the post-renovation value of your home less your mortgage balance.
• Credit score and financial stability: Obtain a copy of your credit report from Equifax, Experian, and TransUnion. Experian considers a credit score of 670-739 good. A favorable credit score can help you negotiate better loan terms. 
• Renovation budget and project scope: Work with a contractor to help you create a budget for your renovation.

Key Factors to Consider When Applying for Home Improvement Loans

• Loan amount needed: You can determine the amount required by working with a qualified contractor and other professionals. Set aside at least 20% for unexpected expenses. 
• Interest rate and loan terms: Compare interest rates and loan terms by sending your applications to multiple lenders. Also, consider other fees, such as closing costs, to help you make an informed decision. 
• Collateral and associated risks: Unsecured loans don’t use your home as collateral. However, they usually come with higher interest rates. Weigh the pros and cons of using a secured vs unsecured loan and ensure you’re comfortable with your decision. Consider your financial capacity and monthly expenses when deciding which loan type to acquire for your home improvement project.

How to Apply for Home Improvement Loans

General Application Process

Lenders typically require proof of income, credit history, and renovation plans. After gathering all financial documents, applicants must complete an application and send it to the lender. They must also submit supporting documents for a renovation loan, such as contractor estimates, permits, and appraisal reports. 

The length of time the process takes depends on the lender. If you apply for a traditional home improvement loan, the lender assesses your eligibility based on your creditworthiness and equity (they use your home’s current value). Once approved, you may be given a lump sum (for home equity or personal loans) or a pre-approved limit with a draw schedule (for HELOC).

Applying for a RenoFi Loan

Use this checklist when applying for a RenoFi loan. 

After submitting your application, RenoFi completes the Renovation Underwriting process, including the appraisal (which can take longer). After the appraisal, the applicant will apply with the lender, and the latter will complete the financial underwriting. RenoFi loan applications can take 30-60 days to complete.

RenoFi: The Smart Way to Fund Your Home Improvement Projects

Homeowners can explore various loan options for their projects. Traditional options, such as HELOCs and cash-out refinances, can provide the needed funding. However, these loans are based on your home’s current market value, which may limit the loan amount. Those with limited equity may struggle to acquire a loan that will cover the project’s entire cost.

RenoFi resolves this problem by using your home’s after-renovation value. We assess your renovation plan and use your home’s future value to calculate your loan. With RenoFi, you can borrow, on average, 11x more than traditional loans. You can borrow 90% of your home’s future value less the mortgage balance or 125% of your home’s current market value, whichever is lower. Contact us and see how much you can borrow.