How Do Home Improvement Loans Work?

A home improvement loan helps you pay for renovations and repairs around the house. You can use a home improvement loan to remodel a kitchen, replace an old roof or add a swimming pool in the backyard.

Consider a home improvement loan along with other options like home equity loans, home equity lines of credit, cash-out refinancing and federal programs.

» MORE: Best home improvement loans

Home improvement loans are unsecured personal loans you can use for any purpose, including home updates. You receive the funds in a lump sum and repay the loan in monthly payments with interest over the loan term, which can be from two to 12 years.

Loan amounts range from $1,000 to $100,000, and annual percentage rates are from about 7.5% to 36%. Rates and monthly payments on home improvement loans are fixed over the life of the loan.

» MORE: Personal loan vs. home equity loans

Online lenders, banks and credit unions offer home improvement loans. Many online lenders can approve your loan application and send funds within a couple of days, while banks and credit unions may take up to a week.

Lenders will consider your credit score, income and debt during the loan approval process. Borrowers with high credit scores and low debt-to-income ratios tend to receive the lowest rates and largest loan amounts. Some lenders will let you add a co-signer or co-borrower to your loan application. A co-signer with a strong credit profile or higher income may help lower your APR or increase the amount you qualify for.

» MORE: Home improvement loans for bad credit

Applying for a home improvement loan is the same as applying for a regular personal loan. Here are the steps:

1. Figure out how much you need. Unlike a line of credit, a home improvement loan is distributed as a fixed lump sum. Have a firm cost estimate for your project before starting the loan process to ensure the amount you receive covers your cost. 

2. Compare loan offers. Pre-qualify with multiple home improvement loan lenders to compare estimated rates and terms. Pre-qualifying involves a soft credit check, which doesn’t affect your credit score. 

3. Gather documents. Lenders will verify your employment and income when you apply. Gathering the documents you need beforehand can speed up the application process. Since there’s no home equity involved with a home improvement loan, you won’t need a home appraisal like you would with a home equity loan or HELOC.

4. Apply. Once you choose a loan, you’ll complete a formal application. Most lenders offer online applications, but some smaller banks or credit unions may require you to apply in person. Once your application is submitted, you may receive same-day approval and funding within one business day to a week. 

» MORE: Calculate monthly payments for a home improvement loan

Generally, a home improvement loan and the interest you pay are not tax deductible.

However, energy-efficiency updates to your home may qualify for tax credits that reduce your tax liability. The Inflation Reduction Act of 2022, or IRA, provides homeowners a 30% tax credit, capped at $1,200 per year, for some energy-efficient updates, including doors, windows and central air-conditioning. There is an additional tax credit of 30% for buying and installing solar panels.

Additional rebates for larger energy-efficient updates are in progress in some states. You can check your state’s progress on the Department of Energy website.

» MORE: Home improvement tax credits and rebates for energy-saving updates

With a cash-out refinance, you get a larger mortgage with a new interest rate and repayment term, and “cash out” the difference to pay for your project. You’ll pay closing costs with a cash-out refinance, but it can make sense if mortgage rates are low and you intend to stay in the home long enough to recoup the costs.

» COMPARE: Best cash-out refinance lenders

The money for a HELOC comes from your equity, which is the value of your home minus the amount you owe on it. It’s a second mortgage that uses your house as collateral.

HELOCs have a draw period, usually 10 years, when you can use some or all of the funds you’re approved to borrow. During that time, you usually make interest-only payments. This is followed by the repayment period in which you repay the principal and interest in monthly payments. HELOCs have variable interest rates, which means your payment amounts may fluctuate.

A HELOC provides added flexibility when you don’t know exactly how much the renovation will cost or if you’re doing a project in stages.

» COMPARE: Best HELOC lenders

Home equity loans, the fixed-rate cousin of HELOCs, are a good choice if you already know how much your project will cost. Unlike HELOCs, you get the funds from this second mortgage in a lump sum, and you immediately start repaying both interest and principal.

One benefit of a home equity loan is that since each payment goes toward the loan’s principal from the start, you rebuild equity immediately. Home equity loans have fixed rates, so when rates are low, you have the chance to lock in low monthly payments.

» COMPARE: Best home equity loan lenders

High APRs on credit cards make them suitable for smaller home updates like a splash of paint, an emergency repair or furniture additions.

Credit cards with 0% APR promotional periods can be ideal for short-term projects that you can pay off during the promotional period — typically 15 to 21 months. Otherwise, you face steep interest rates if you carry a balance.

» MORE: Best credit cards for home improvement projects

The Department of Housing and Urban Development offers Title I Loans, which can help you finance a home renovation project at little or no expense.

These loans are government-issued, and eligibility requirements can vary by state and municipality. They’re for renovations that improve your home’s basic livability, according to HUD.

If your plans include energy-conscious updates, you may be eligible for a government-issued energy-efficient mortgage. The North Carolina Clean Energy Technology Center maintains a database of state and local incentives for energy-efficient updates.

» MORE: First-time home buyer loans and programs