6 Loans for Home Improvement: Which One Is Right for You?

Whether you're hoping to increase your home's resale value or just want to personalize your space, there are many good reasons to make home improvements. The tricky part can be figuring out how to pay for them.

When it comes to financing home renovations, you have many options to choose from—each with its own pros and cons. Learn more about the common types of loans for home improvement, from home equity-based loans to unsecured loans to cash-out refinances.

Home equity loan

Home equity loans may be one of the most well-known types of home improvement financing due to their attractive rates and competitive terms. These loans allow you to borrow a lump sum against your home's equity, which is the difference between what your home is worth today and the outstanding mortgage or any other loan balances against it. Home equity loans typically offer a fixed interest rate, and your repayment terms may range anywhere from 5 to 15 years.

Pros and cons of a home equity loan

Home equity loans tend to be an appealing borrowing option if you're financing a large project, like a renovation that can increase your home's value. They also have interest rates that are typically much lower than other loans for home improvements. Plus, under current IRS rules in effect through 2025, the interest paid on a home equity loan is tax-deductible—subject to certain dollar limits—as long as the funds are used to upgrade your home.

However, if you're thinking of selling your home in the near future, be aware that you may need to repay the loan in full before doing so. Also, because your house is being used as collateral for the loan, you may find yourself owing more than the home is worth if real estate values decrease. Finally, if you fail to repay your loan and go into default, your lender may foreclose on your home to recoup any unpaid debt.

Home equity line of credit

A home equity line of credit, or HELOC, is another popular option for financing home improvements. Similar to a home equity loan, a HELOC allows you to borrow against your home's equity. However, instead of receiving a lump-sum amount, you'll have access to a revolving line of credit that can be used as needed.

Pros and cons of a HELOC

HELOCs offer a few key benefits, including competitive interest rates and potential tax deductions. Likewise, the ability to borrow funds on an as-needed basis may be a key advantage if you're unsure how much you'll need to borrow or if you're pursuing ongoing home improvement projects. Plus, you'll only pay interest on the amount you withdraw from your line of credit.

However, there are a few nuances to consider. HELOCs differ from home equity loans because they typically have variable interest rates, meaning the cost to borrow may increase at any time. It can also be easy to overspend when credit is readily available to you. And like a home equity loan, if you fail to repay as agreed and your loan goes into default, you may risk losing your home.

Home improvement loan

A home improvement loan may be an attractive option if you need quick access to funds and want to borrow up to $75,000. Home improvement loans are typically unsecured—meaning a lien won't be placed on your home, no equity is required and there's no appraisal or lengthy closing process. Instead, lenders will evaluate your credit score, credit history and debt-to-income ratio to determine your eligibility and borrowing power.

Pros and cons of a home improvement loan

Home improvement loans typically have fixed interest rates, so your monthly payment should remain the same for the life of your loan. Because they're unsecured, the interest rate on a home improvement loan may be higher than the rate on a home equity loan or HELOC, and the interest paid isn't tax-deductible. However, they may be an appealing choice for new homeowners who haven't had an opportunity to build equity or anyone who isn't comfortable with using their home as collateral.

Financing from a general contractor

If you're working with a general contractor, you may be able to secure financing directly through their lending partner. As with bank-issued home improvement loans, these loans are unsecured, and your borrowing terms will be based on your financial profile and creditworthiness.

Pros and cons of contractor financing

It can be tempting to say yes to a contractor's offer of financing when they're standing in your kitchen, estimate in hand, promising quick and efficient work. The chief benefit here is convenience. With a contractor, there may be a shorter lag time between the time your loan is approved and the time work starts compared to other financing options.

Of course, there are a few downsides to acknowledge. You'll be required to apply for the funding from your contractor's lending partner, which will limit your ability to compare interest rates and terms across multiple lenders. Also, if you're approved for a loan that's larger than expected, you may feel pressure to spend more than you initially planned.

Cash-out refinance

A cash-out refinance allows you to tap into your home's equity by refinancing your mortgage for an amount greater than what you currently owe, with the difference paid out to you in cash. The total amount of your loan will be determined by your lender based on a variety of factors, including your current home equity, credit history and debt-to-income ratio.

Pros and cons of cash-out refinancing

The advantages and disadvantages of a cash-out refinance are similar to other secured loans for home improvement projects. Benefits include attractive interest rates and the potential for tax deductions.

As with other equity-based loans, though, your home will serve as collateral, which can be risky. Likewise, a cash-out refinance reduces equity in your home and restarts the clock on your mortgage. This can be a problem if your existing mortgage has a lower interest rate than what's currently available to you. Like with a traditional mortgage refinance, you'll also need to pay closing costs.

Home improvement credit card

Many large home improvement stores offer credit cards, which may be a convenient option if you like do-it-yourself projects and plan to purchase supplies from a single store. As with other types of store credit cards, you may be able to apply during checkout and receive approval on the spot.

Pros and cons of a home improvement credit card

Some home improvement credit cards may offer introductory financing or special discounts on merchandise, which may be beneficial. However, the standard APR on most store credit cards can be quite high, making them a potentially risky and expensive solution for anything but the smallest, most manageable projects. Ultimately, it's important to carefully weigh the benefits against the risks. In some cases, using a traditional credit card with cash back rewards may be a far better solution.

Key takeaways

• Figuring out how to pay for home renovations may seem daunting, but take the time to research the various types of loans available for home improvements so you can make a more informed decision.
• If you've built up equity in your home, a home equity loan, HELOC or cash-out refinance are three home improvement financing options to consider.
• If you'd prefer not to use your home as collateral or don't have sufficient equity built up in your home, a bank home improvement loan is a possibility.
• Looking at current interest rates, loan terms and your own financial circumstances can help you choose the best home improvement loan for your unique situation—and allow you to create a living space you enjoy.