Personal loans for home improvement are just one possibility among many to fund renovations. Every type of loan comes with pros and cons, and personal loans are no exception.
If you are looking for ways to finance renovations, such as a kitchen upgrade, new hardwood floors, or even a backyard pool, a personal loan might be one option to consider. However, it should be weighed against the pros and cons of other methods to finance home renovations, and we will dive into those below.
What Is a Personal Loan?
A personal loan is unsecured, meaning the borrower is not required to provide collateral to the lender. Home improvement loans are usually structured so that the house itself is collateral. Therefore, the borrower is incentivized to avoid default, knowing that it can result in the loss of the home.
It seems counterintuitive to think someone would want funds to renovate a home and then go on to lose that home by not paying the loan back, but it happens! Unexpected challenges may arise, such as a health event or job loss, that make it difficult for homeowners to keep up with payments, especially when they have negotiated loans with less than favorable terms.
A personal loan may allow you to borrow money without putting your house up for collateral, but that comes at a price. You will see higher interest rates associated with these loans, so you have to look at the bigger picture and consider what you will pay in the long run.
Additionally, unsecured personal loans simply aren’t available to all borrowers because of the qualification process. Your credit score and other factors may prevent you from finding a lender who will work with you to provide the funds.
Personal loans are not limited to home renovations; borrowers use them for a variety of reasons, from consolidating debt to paying off medical expenses. You may very well take out a personal loan at some point in the future, though it may not be the best choice if you need to fund a home renovation.
Other Loans for Home Improvement Projects
Unsecured personal loans are not the only option for homeowners to fund a renovation. Most people do not have the cash on hand to tackle larger home renovations, so other loans are often used instead.
1. Credit Cards
In some cases, a homeowner may cover a project on a credit card, but the limits are typically not high enough to cover an entire renovation. You might be able to put a bathroom renovation on a credit card with a promotional interest rate offer, for example. Be diligent in making plans for repayment before the promotional period ends, or you could face a steep increase in interest.
2. Home Equity Loan
A home equity loan offers the borrower a chance to secure funds based on the home’s equity, which is calculated by subtracting what you owe on the mortgage from the home’s current value.
These are lump sum loans with fixed rates, so they are favored by those with a lower risk tolerance who can stick closely to a plan of repayment. However, there is still a risk associated with putting your home up as collateral.
3. RenoFi Home Equity Loan
Instead of only using the equity you have in your house, RenoFi allows you to use the After Renovation Value (ARV) of your home as a lump sum at a fixed interest rate.
For example, if RenoFi assesses your renovation plan and believes you will increase the value of your home from $600,000 to $750,000, RenoFi loans will allow you to take a loan against the future ARV (After Renovation Value) of your home of $750,000.
Let’s walk through a couple scenarios where you want to spend $150,000 to renovate your home that will increase your home value by $150,000.
Scenario 1 (New Home Purchase):
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
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)
Example RenoFi Home Equity Loan Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Home Equity Loan Amount)
Using a RenoFi Home Equity Loan you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).
Without RenoFi loans, you would not have been able to borrow the $150,000 needed to add the renovations that would increase the value of your home by $150,000. Now, with RenoFi loans, you are now able to get the loan you need to add the renovations you want to your home.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Home Equity Loan Amount:
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)
Example RenoFi Home Equity Loan Amount:
Assuming that your renovation project will add $150,000 to your home value
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 Home Equity Loan Amount)
Using a RenoFi Home Equity Loan you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value).
Here’s a summary of the difference between traditional and RenoFi home loans in table form:
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
RenoFi loans are funded on the day the loan is closed and that is it. Take out the $195k and you get $195k in your bank and you have 20 years to pay off in equal monthly payments with interest and principal, just like a standard mortgage.
4. Home Equity Line of Credit
The home equity line of credit (or HELOC) has a variable rate, so there is more risk involved, but you also have the money “available” to use rather than drawing it out all at once. This revolving credit line may be used as you need it, and once again, the home itself is tied as collateral to the loan.
5. RenoFi Home Equity Line of Credit (RenoFi HELOC)
Unlike traditional loans, RenoFi HELOCs allow you to use your home’s After Renovation Value (ARV), which can 11x your borrowing power.
Scenario 1 (New Home Purchase): Using the same example above of borrowing $150,000 for renovations to increase the value of your home by $150,000:
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Home Equity Line of Credit Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Line of Credit Amount)
Example RenoFi Home Equity Line of Credit Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Home Equity Line of Credit Amount)
Using a RenoFi Home Equity Line of Credit you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).
RenoFi HELOCs provide a line of credit secured by your current home.
Example RenoFi HELOC Terms:
Years to use credit line: 10 Years
- Interest Only Period: 10 Years
Credit Amount: $195,000
Repayment Term: 15 years
In this example, you’ll have 10 years to use your credit of $195,000. Within those 10 years, just like a credit card, if you borrow against the credit line and pay it back, you will not pay interest.
However, for anything borrowed against your credit, that you do not pay off immediately, you will only pay interest during the first 10 years and then interest and principal after year 10.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Home Equity Line of Credit Amount:
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 Amount)
Example RenoFi Home Equity Line of Credit Amount:
Assuming that your renovation project will add $150,000 to your home value
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 Home Equity Line of Credit Amount)
Using a RenoFi Home Equity Line of Credit you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value).
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
6. Cash Out Refinance
A cash out refinance is basically a new mortgage that achieves two things: it pays off your old mortgage and also funds a renovation. This is possible by taking out a loan for more than you owe on your house. It offers a way to secure funds for bigger renovations, and in the best-case scenario, you may end up with a lower interest rate.
Consider carefully the rates and fees associated with a cash-out refinance to ensure it will put you in a better long-term position than other types of home renovation loans.
7. RenoFi Cash-Out Refinance
Similar to other RenoFi products, with a RenoFi Cash Out Refinance, you can receive a larger amount of cash based on the After Renovation Value (ARV) of your home.
Scenario 1 (New Home Purchase): Using the same example above
- Home price: $600,000
- Downpayment (20%): $120,000
- Current Mortgage Amount: $480,000
Example Cash Out Refinance Amount:
- $600,000 * 80% = $480,000 (80% of Total Home Value)
- $480,000 - $480,000 (Current Mortgage Balance) = $0 (Cash Out Refinance Amount)
Example RenoFi Cash Out Refinance Amount:
Assuming that your renovation project will add $150,000 to your home value
After Renovation Value of Your Home: $750,000
RenoFi Loan Amount:
- $750,000 * 90% = $675,000 (90% of Total Home Value)
- $675,000 - $480,000 = $195,000 (RenoFi Cash Out Refinance Amount)
By writing a loan against your equity in the after-renovation value of your home, RenoFi allows you to borrow funds for renovation against $750,000 versus $600,000. This increases your loan amount from $0 to $195,000, allowing you to borrow infinitely more than a traditional Cash Out Refinance for renovations.
This allows you to receive the $150,000 you were looking for with house renovations and even offer $45,000 above what you were asking for in case you needed more money for renovations.
Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:
- Home price: $600,000
- Current Mortgage Amount: $420,000
Example Cash Out Refinance Amount:
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 (Cash Out Refinance Amount)
Example RenoFi Cash Out Refinance Amount:
Assuming that your renovation project will add $150,000 to your home value
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)
Using a RenoFi Cash Out Refinance, you have increased your loan amount from $60,000 to $255,000 because the RenoFi loan is written against the assessed after renovation value (ARV) of $750,000.
Again in this scenario, using RenoFi you are able to borrow significantly more than traditional loan options and borrow the $150,000 you are looking for to make your renovations and even have the option to receive $105,000 on top of the $150,000.
In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:
- No draw periods
- No inspections
- No need to give up your original loan
- Higher borrowing limits
8. Government-Backed Loans
Government-backed loans for home improvements offer homeowners affordable financing options they can use to make necessary upgrades or repairs to their home. Here are some of the options available:
- FHA 203(k) Loans: The Federal Housing Administration (FHA) backs these loans, which can be used for structural improvements, roof replacement, and kitchen remodels.
- FHA Title 1 Home Improvement Loans: These don’t require a home equity position. The funds can be used for repairs, modernization, and improvements that add value to the home.
- VA Home Improvement Loans: The Department of Veterans Affairs (VA) offers loans to veterans and active duty service members for home improvements, including accessibility modifications, repairs, and renovations. There aren’t usually any down payments, and the rates are competitive.
When You Shouldn’t Get a Personal Loan for Home Improvements
Traditional personal loans can be a good financing option for home improvements but there are specific situations when it might not be the best idea.
- Poor Credit Score: If your credit score is lower, you may face higher interest rates, which will increase borrowing costs.
- Inconsistent Income: If you already have a significant amount of debt, a personal loan could increase your financial burden and negatively impact your credit score.
- Low-Cost Projects: Smaller projects can be funded through savings and can help you avoid unnecessary debt.
- High-Cost Projects: Given the higher interest rates of personal loans, it is often advantageous to fund these projects using a RenoFi or home equity loan.
- Undefined Project Scope: If your project scope, goals, or budget are not clearly defined, this can lead to overspending and financial stress.
- Non-Essential Improvements: If the renovations are primarily cosmetic and won’t really contribute to the home’s value, you might want to delay borrowing.
How to Use a Personal Loan for Home Improvements
Some of the more common home improvement projects you might be interested in include kitchen and bathroom remodels, deck additions, solar panel installations, roof replacements, inground swimming pools, and landscaping. Determine the scope of the renovations you plan to tackle and contact contractors for quotes to understand the total cost of your renovation projects.
Traditional personal loans are typically under $50,000, making them ideal for those smaller projects on your list. However, if you need more funding, consider a RenoFi personal loan. You can have access to up to $100,000 in funding with a RenoFi personal loan, along with repayment terms of up to 20 years.
RenoFi Loans for the Financing You Need
Many of the loans described above limit your borrowing power to what your house is worth today. But what if you could harness more borrowing power by looking toward the future? That is exactly what RenoFi does. We help you secure a home renovation loan based on the after-renovation value (ARV).
Here’s why more people are turning to RenoFi:
- Increased Borrowing Power: Traditional loans often limit you to borrowing up to 80% of your current home value. Alternatively, RenoFi allows you to borrow up to 125% of your home’s current value or 90% of its future value, whichever is lower. This means more money for your renovation project without the need to refinance.
- No Need to Refinance: With RenoFi loans, you can keep your existing mortgage and its low rate intact while accessing funds for your renovation. This is a huge benefit if you’re locked into a favorable rate and don’t want to refinance.
- Streamlined Process: Unlike other loans, RenoFi loans don’t require complicated draw schedules and inspections. This makes it easier to start and complete your project on time.
Conclusion
Choosing the right home renovation loan can make or break your project. While traditional loans like HELOCs, personal, and FHA 203(k) loans have their place, they often come with limitations that can restrict your renovation plans. But RenoFi loans give homeowners a unique and flexible alternative.
By leveraging your home’s after-renovation value, RenoFi allows you to borrow more without the need to refinance your existing mortgage or deal with complex draw schedules and inspections. Therefore, if you are a homeowner looking to maximize your renovation potential, RenoFi loans are the best choice.
Unlike traditional loans, which are based on your current home value or require you to refinance, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage.
Explore your RenoFi loan options here.
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