If you’re planning to renovate, you want to start by calculating the costs of your project. The next step is to explore financing options and use a loan calculator to get an idea of your monthly payment based on your budget.
A home improvement loan calculator can also help you gauge if you can afford to finance your project or if you need to cut costs before moving forward.
What is a Home Improvement Loan?
A home improvement loan is a term that describes a debt product used to fund additions, renovations, or other home improvements.
It’s not a specific type of loan, though. There are several types of loans, both secured and unsecured, marketed as or used for home improvement loans.
How Does a Home Improvement Loan Work?
Secured debt products often used for home improvements include home equity loans, home equity lines of credit (HELOCs), and cash-out refinance loans. Your home acts as collateral to secure the loan, and the lender could foreclose if you fall behind on loan payments.
Unsecured debt products commonly used to fund home renovations include personal loans and credit cards. You can get approved for a personal loan without putting up your home as collateral so that you won’t be at risk for foreclosure. If you use a credit card and default on the payments, you could sustain credit damage and face collection activity, but the lender won’t have rights to your property.
How to Finance Your Home Improvement Project
Below is a detailed breakdown of the options available to finance your home improvement project.
Home Equity Loans
A home equity loan is a second mortgage. It allows you to borrow 75 to 80 percent of your equity (current value minus what you owe) and is paid out in a single installment. The interest rate is fixed, and most lenders offer a repayment period of five to 30 years.
Assume you paid $210,000 for your home and currently owe $150,000. If market conditions have recently improved, skyrocketing your home’s value to $300,000, you now have $150,000 in equity. You can potentially borrow up to $120,000 with a home equity loan.
Home Equity Lines of Credit (HELOCs)
A HELOC allows you to borrow against the equity you currently have in your home. If approved, you will have access to a line of credit up to the approved amount for 10 years. This period is known as the draw period, and you’re free to withdraw up to the amount you need, up to the credit limit, until it ends. You will then enter a 20-year repayment period where you’ll make principal and interest payments.
Interest rates on traditional HELOCs are generally variable, and the payments you make during the draw period will mainly include interest. You will also be limited to 80 percent of the equity in your home minus what you still owe on your mortgage.
Cash-Out Refinancing
A cash-out refinance allows you to refinance your home while pulling out the equity in cash. When you apply, the lender will calculate the equity you have in your home by subtracting your home’s value from the amount you owe. This figure is then multiplied by 80 or 85 percent (or higher if the lender permits) to determine your loan amount.
At closing, you receive the loan amount in cash. When payments resume, you pay on the new loan (that includes the original loan balance and the amount you cash out) for 15 or 30 years, depending on the term.
Personal Loans
You can also fund your home improvements with an unsecured personal loan. Collateral isn’t required, so your home won’t be at risk for foreclosure if you fall on hard times. But you’ll need stellar credit to qualify for the best rates, and your payments could be on the higher end since most come with loan terms of five or seven years.
Credit Cards
Credit cards are a costly way to pay for home improvements unless you get a 0% interest credit card. The trick is to pay the balance off within the promotional APR period, or you could spend several thousand dollars in interest over time paying down the balance.
Home Improvement Loan Calculator
Once you’ve set a budget and explored financing options, use a home improvement loan calculator to get an idea of your potential borrowing power and loan terms.
Calculate How Much You Can Borrow for Your Home Improvement Project
The amount you can borrow will depend on several factors, like your loan type, current home value, outstanding mortgage balance, location, and credit score. Use an online calculator with the lender you’re considering, like this one, to get a more accurate estimate.
Estimate Your Monthly Home Improvement Loan Payments
You can use an online calculator to easily estimate your monthly payments by inputting the loan amount, interest rate, and repayment term.
Where to Get a Home Improvement Loan
It depends on the type of loan you want, your credit health, and your home’s equity. An unsecured personal loan may be best if you need to make improvements soon and have good or excellent credit. But beware that payments could be steep, depending on how much you borrow and the loan term. You can also use a 0% APR credit card to fund your project if you can pay it off before the promotional interest period – usually between 12 and 24 months – expires.
Prefer to leverage your home equity to secure funding? A home equity loan, HELOC, or cash-out refinance may be a better fit. The application process and time to funding are more drawn out, but you could be eligible for a tax deduction on any interest paid. Plus, you could score a lower interest rate than you’d get with an unsecured personal loan or credit card. And you’ll likely have a more extended period to repay what you owe.
