There are many ways to pay for home improvements, from traditional home improvement loans to personal loans to home equity lines of credit to government programs to credit cards. Regardless of which type of loan you’re considering and what type of lender you want to work with, shopping around will help you make sure that you’re getting the best rate and terms on your home improvement loan. If you apply with several lenders within a short period, the impact on your credit score will be minimal. (For more, see The 5 Biggest Factors That Affect Your Credit, An Introduction to the FHA 203(k) Loan and Applying for an FHA 203(k) Loan.)
In a cash-out refinance, you get a new loan to replace your mortgage, but instead of borrowing the same amount you currently owe, you borrow more. Let’s say your home is worth $240,000 and you owe $120,000 on your mortgage. If you did a cash-out refinance, you could get a new loan for $192,000. After paying off your $120,000 mortgage, you would have $72,000 to put toward home improvements (or any other purpose, such as sending your child to college).
SoFi is known for student loan refinancing, but the online lender also offers personal loans for house remodeling. You can borrow as little as $5,000 or as much as $100,000 and repay it over two to seven years. SoFi loans also come without origination fees and prepayment penalties. They even have an unemployment protection program that can temporarily pause your payments if you lose your job.
The catch is that to keep the 0% rate, you will likely be required to make minimum monthly payments on time every month, even during the 0% introductory period. You need a clear plan for repaying the full amount you borrow before the introductory period ends, or else you will have to pay interest on the remaining balance, usually at a much higher rate.
One advantage of these loans is that borrowers can get them very quickly—within a few days or even the same day—less time than it typically takes for a bank to approve a home-equity-based loan or line of credit, says Steve Allocca, LendingClub's president. What's more, you're not putting your home at risk when you borrow this way because it's not used as collateral against the loan.
The best time to apply for a home improvement loan is when you have a large renovation project you want to tackle. That could be adding another bathroom to your home, roofing your house or installing a pool, or any other major home-related project. This type of loan is a good option if you don’t have a lot of equity in your home to draw from but need or want to make home improvements.
To make sure you are getting the best deal, comparison shop with several lenders, including your mortgage servicer. Requesting a pre-approval or applying for several remodeling loans won’t damage your credit—McBride says the credit bureaus lump similar applications into one inquiry – but it will help you to find the lowest interest rate and the best terms.
If you tend to have trouble getting out of debt, keeping your finances organized or meeting deadlines, this isn’t a good option for you. Borrowers who are disciplined, detail oriented and spend within their means could find this to be the least expensive option. However, it may not be possible to borrow as much with a credit card as you could with a home equity loan or cash out refinance, depending on how much equity you have and how good your credit is.