Choosing the Best Home Improvement Loan

When you buy a home, it doesn’t usually take long before you see places where you can make improvements.  Updating your home not only creates a sense of ownership beyond your name on the title, but it can also increase your home’s value, energy efficiency, and overall comfort level.  In 2018, homeowners spent an average of $7560 on home improvement projects.  Considering how much you can save and/or increase the value, it’s understandable why so many are investing in this way.  But as few of us have that kind of money just lying around, home improvement loans are able to help.

Home Equity Loan

A home equity loan borrows against the equity you have in your home.  It is a secured loan, which means your house is used as collateral to protect the bank if you fail to repay the loan.  You can borrow up to 85% of your equity and is for a fixed amount of money.  You can use it for whatever you want, including home improvements. Generally speaking, a Home Equity Loan makes more sense if you are making drastic improvements (like a kitchen or bathroom renovation) and looking to borrow a large amount.  Because Home Equity Loans are subject to similar terms as mortgages, you can often get a lower interest rate (currently hovering around 5.5%) and pay over 15 or 30 years.

Personal Loan

Personal loans are often used for smaller home improvement projects.  They are easier to qualify for, especially for new homeowners who don’t have much equity.  However, the interest rates aren’t as good.  That being said, they are unsecured, which means you aren’t putting your home up as collateral.  And the shorter term means that you will pay it off a lot faster.

Other Types of Home Improvement Loans

FHA 203(k) Loan

And FHA 203(k) Loan is a great alternative for someone who is looking to refinance as well as renovate their home.  There are a few more hoops to jump through compared to a home equity loan or personal loan and the money doesn’t go directly to you, but it’s a great alternative if your home needs extensive work.

Energy-Efficient Mortgage (EEM)

Maybe you’re happy with your home and what you really want is to reduce your utility payments and become more energy efficient.  If this is the case, switching to solar is an excellent investment.  Solar companies have several financing options that can help you switch.  If you want to do more extensive energy efficiency updates, the Energy Efficient Mortgage might be for you.  According to “EEMs provide the borrower with special benefits when purchasing a home that is energy efficient, or can be made efficient through the installation of energy-saving improvements.”

If you are looking to buy or refinance, EEM is certainly something you should check out.

Credit Cards or Store Financing

For smaller, less expensive projects, such as renovating a small bathroom or putting in a new floor, paying for it with a credit card or store card may be the simplest way to go.  However, the interest rates are usually very high and it can still take you years to pay off the amount that you borrowed.


The option that has the least amount of risk associated with it is simply saving up and paying cash.

Regardless of which loan you choose, you should talk to your financial advisor and compare different options.