Get the most out of a home improvement loan by comparing sites and spending it wisely
Home improvement loans fell out of popularity fast after the housing bubble burst in 2008. After all, why borrow to improve your home if the price is going to fall anyway.
Ten years after the collapse and home prices are rising again. The average home price in American is up by 53% since 2012 according to the Federal Reserve. That’s an annual increase over 6% and not a bad investment when you consider money saved on rent as well.
But with interest rates on home improvement loans as high as 24% for bad credit borrowers, you can’t just jump into the first application accepted.
Understanding how to compare home loans and other financing alternatives will help you make the best decision, create your dream home and…most importantly, save money.
Is a Home Improvement Loan a Good Idea?
There are two reasons you might consider a home improvement loan, to boost the resell value or just to make your home more comfortable.
The first reason seems like a no-brainer but comes with a warning. Some homes absolutely need a little TLC before they’ll sell. Taking out a home equity line of credit or other type of loan might not make sense if you plan on immediately selling the house.
On the other hand, you might be able to sell your home without the improvements and still get just as much. This is where a little research will go a long way to saving you money.
The problem is that most home improvement projects don’t get 100% payback in a sale. For example, making exterior improvements like siding repair may only recover about 95% of what you paid.
If you are planning on taking out a home improvement loan to increase the value of your home, Remodeling Magazine’s 2016 Cost vs Value Report can help you get the most bang for your buck.
Home Improvement Projects with the Highest Payoffs:
- Attic insulation – Average cost $1,268 versus resale value $1,482 (117%)
- Bathroom remodel – Average cost $10,500 vs resale value $10,700 (102%)
- Landscaping – Average cost $4,967 vs resale value $5,000 (100%)
- Kitchen remodel – Average cost $14,913 vs resale value $14,691 (98.5%)
- Exterior improvements – Average cost $7,239 vs resale value $6,914 (95.5%)
If the house will not sell without a repair, I’d say definitely go ahead and make it. You might try putting it on the market first though to see if you get any offers without the repair.
The second reason to get a home improvement loan, just to enjoy your home a little more, is actually the easier choice.
The numbers guy in me says don’t take a loan unless you’re planning on getting something out of it in a sale but there’s something else we should consider. Improving your home if you plan on living there longer not only means you’ll get the eventual boost to the resale value but you’ll also get that emotional value for years.
That extra value can make up for the small loss you take in what you pay for an improvement project and what you get out of it when you sell.
Can You Get a Home Improvement Loan with Bad Credit and No Equity?
This is probably the most frequent question I get about home improvement loans and I’ve actually got some personal experience in it.
Most of you know that I destroyed my credit in 2008, getting sucked into some bad real estate deals that drained our savings. My FICO dropped from nearly 800 to 560 FICO in less than a year and I couldn’t get a loan for a pack of gum.
It got so bad that my wife and I had to move into the basement of a relative’s house to save money and get back on track.
Then we found an amazing deal on a foreclosed home in 2010. It needed a complete remodel but we were able to buy the house for just $25,000 we had saved over a couple of years. My credit score was still below 600 FICO though so there was no way I was going to get a traditional loan to remodel the house.
Instead I was able to get a home improvement loan from a personal loans website that specialized in bad credit borrowers. We borrowed another $25,000 and paid for the rest of the repairs each month from savings.
Without that home improvement loan, we couldn’t have turned the house into our dream home and there’s no way we could have waited to improve my credit score.
Understand that a home improvement loan on bad credit is going to come with higher rates. I was able to get our loan at 24% which meant payments around $700 a month. I was able to refinance the loan a year later at 7% after remodeling the house so the interest wasn’t too bad but your first priority is going to be to pay off the loan early.
We used PersonalLoans.com for our loan but I’ve included a table here of other loan sites I recommended
|Peer to Peer Lending Site||Loan Fees||Credit Score Needed||Loan Rates||Notes|
|5%||580||9.95% to 36.0%||Best p2p loan site for bad credit borrowers. Lower credit score and three options including peer loans, bank loans and personal loans.|
|No Fee||Not available but higher than most, around 680 FICO||5.95% to 14.2%||Special discounts for variable rate loans. Offering $100 cash back on peer loans.|
|1% to 6%||620||6.25% to 30.0%||Best peer loans for graduates and no credit history.|
|No Fees||520||Vary by State||No fees and lowest credit requirements for lenders|
|1% to 6%||640||6.95% to 35.89%||Low rates on p2p loans for good credit borrowers.|
What Credit Score do you Need to Get a Home Improvement Loan?
The credit score you’ll need for a home improvement loan depends on the type of loan and where you are approved.
- Equity loans like a HELOC generally have the highest credit score requirements because you’ve already got a mortgage on the house. You’ll usually need a minimum score of 700 FICO to get a HELOC loan.
- Mortgages or refinancing will have slightly lower credit score requirements but will still generally mean a score above 670 FICO.
- Personal loan websites vary in their credit score requirements but range from 560 FICO for bad credit sites like PersonalLoans to as high as 680 FICO for sites like SoFI.
Even if you don’t think you’ll get approved for a loan because of your credit score, I usually recommend applying with at least a few sites and places. Most of the personal loan websites do what’s called a soft-pull on your credit to pre-approve and estimate your rate. This kind of credit check doesn’t hurt your score so it’s a good way to make sure you’re getting the best rate available.
Even for the loans and sites that do a hard-pull of your credit, the kind that will affect your credit score, you still want to apply for a loan. Applications for the same type of loan within a 30-day period all get lumped together as one inquiry.
That means whether you apply at one place for a loan or fill out five applications, your credit score isn’t going to be affected for a month. By then, you’ll have your loan and won’t have to worry about your score.
How to Get the Best Home Improvement Loan Rate
If you’re looking for a home improvement loan on a personal loan site, there are a few things you can do to get better rates.
- Borrow only as much as you need. Lower loan amounts come with lower interest rates because there’s less risk you won’t repay. Consider only borrowing enough for the first two- or three-months of the improvement project and then paying the rest out of monthly savings.
- Shorter loan terms come with lower rates. For example, a 36-month loan will have a lower rate compared to the same loan made on 60-month terms. Get the shortest loan term you can while still being able to afford the monthly payment.
- Apply on several personal loan sites, even if you don’t think your credit score is high enough to qualify.
- If you can wait a couple months, pay down any credit card debt to boost your FICO fast.
Home Improvement Loan Alternatives
There are some home improvement loan options you should consider, especially if you have bad credit and cannot get a loan. Personal loans can get really expensive if you don’t pay them off early like we did so I usually recommend them as a last resort.
You’ve got four options for home improvement financing, from tapping equity in your home to taking out loans unrelated to your home’s value.
I’ve ranked the loan options for major home improvement projects by rates, from lowest to highest.
- Refinancing or taking out a second mortgage on your home usually means lower rates but much higher fees. You have to get an appraisal and it usually doesn’t make sense unless you need a loan in the tens of thousands of dollars. These loans are going to be very long-term so you might consider another source if you don’t want to be paying for that new bathroom for decades.
- Home Equity Line of Credit (HELOC) is a smaller loan to get money from the difference between your home’s value and how much you owe on the mortgage. It’s typically a smaller loan compared to refinancing but can still offer low rates because the loan is secured against your home.
- Personal Loans are unsecured, which means you don’t have to worry about getting your home foreclosed if you run into financial trouble. Rates are higher but there is no prepayment penalty. Loans are available up to $40,000 and on terms from three- to seven years.
- Credit Cards should be your last option for a home improvement loan. If you need less than $1,000 and can pay it back within a month or two, then it might make sense to charge your DIY project. Otherwise, rates of 18% and higher can make that walk-in closet a financial burden.
When we first started our home makeover, there was absolutely no equity in the house. We took out a personal loan to get things started and scored big time during Black Friday at the home improvement store. Later in the project, we were able to refinance and took out a HELOC to pay off the loan and finish the remodel.
A home improvement loan can be a great opportunity to get a little more out of your home or just enjoy it more while you’re there. Make sure you understand your loan options as well as how much they cost in interest. Compare home improvement loans by applying for at least a few to make sure you get the best rate possible.