If you are planning to remodel, there’s a really good chance that you’re considering your options on how to finance it.

After all, a renovation can be expensive and it’s not uncommon for homeowners to need to find $100,000 or more to tackle their entire list of projects.

In this guide we’ll explain all the loan options you can use to finance your renovation.

What Is A Home Improvement Loan?

Home improvement loans are a way to borrow money to finance renovations or additions.

But this isn’t just a single type of loan; despite what some lenders or banks might lead you to believe.

In fact, there are a number of different types of renovation financing that are marketed under the title of ‘home improvement loans,’ and this can make it incredibly confusing if you’re a homeowner looking to find the best way to pay for your project.

On one hand, some home improvement loans are actually home renovation loans that let you borrow based on your property’s after renovation value.

But on the other, many are nothing more than high-interest unsecured personal loans.

Below, we’ll break down the different types of loans that fall into this category and help you to understand the pros and cons of each, making it easier to determine which is the best way to pay for your renovations.

What Types of Home Improvement Loans Are Available?

To help you compare the different options that are available, let’s take a look at each of these on their own.

• Unsecured Personal Loans
• Home Renovation Loans
  • RenoFi Loans
    • RenoFi Home Equity Loan
    • RenoFi HELOC
    • RenoFi Cash-out Refinance
  • Construction Loan
  • Fannie Mae Homestyle Renovation Loan
  • FHA 203k Renovation Loan

Unsecured Personal Loans

We’ll come straight out and say it; many homeowners shouldn’t use a personal loan for home improvements.

But this is where things get a little confusing and complicated when talking about home improvement loans.

A large number of the finance products that you see advertised as ‘home improvement loans’ actually aren’t a specialized method of renovation finance at all; they’re simply unsecured personal loans that are marketed to homeowners looking to finance a remodel.

Whereas renovation loans are specialist products that have been designed with home improvements or construction in mind, lots of ‘home improvement loans’ are no different from any other personal loans other than the way they’re advertised.

You might also find credit cards marketed in this way, too.

Borrowing using a personal loan means that, in comparison to other options, monthly payments will be higher (due to higher interest rates and a shorter payback period), your borrowing power will be significantly less - and the interest paid isn’t tax-deductible. Many also come with a steep origination fee.

That said, they may be suitable for those looking to borrow a smaller amount or who need the money immediately.

Home Renovation Loans

Home renovation loans are, for most homeowners, the most efficient way to pay for home improvements, given that they allow you to borrow based on your home’s estimated future value, rather than having to rely upon the equity you currently have.

You see, in almost all cases, your home’s value will increase when you undertake renovation work. And renovation loans let you tap into this value now.

Homeowners who have recently purchased may have to wait 10+ years to have built up sufficient equity to finance their entire renovation wishlist.

Even the most basic renovations are out of reach for years when equity is your only leverage, which is why home renovation loans are such an attractive option.

But again, there isn’t just a single type of renovation loan to get your head around, and below we’ll dive deep into the four main options that you have available to you:

RenoFi Loans

A RenoFi Loan is the only home equity loan that is also a renovation loan.

If you’re looking for a way to finance your renovation project and get the highest possible borrowing power (often by more than 11x) at the best possible rates (equivalent to traditional home equity loans or line of credit) and lower fees, this is the perfect way to borrow.

These loans don’t require the funds to be disbursed to contractors through a messy inspection & draw schedule process, which is why many contractors hate construction loans.

RenoFi Loans have been designed as a specific way to finance renovations and to provide the ease of a home equity loan with the borrowing power of a construction loan, allowing you to borrow more and tackle your entire renovation wishlist in one go.

RenoFi Loans include RenoFi Home Equity Loans, RenoFi Home Equity Lines of Credit, and RenoFi Cash-Out Refinancing.

Construction Loans

Construction loans were never originally intended to be used as a way to finance renovations, rather for the build of a home from the ground-up.

Until recently, however, there were few other options that allowed homeowners to borrow based on their home’s estimated future value, hence why they became recommended as a way to pay for major home improvements.

But given that ground-up construction carries a whole load of risk, lenders put in place a stringent set of criteria that must be met, including requirements such as draw schedules and approvals, all of which add delays and extra work to the process.

There are two main types of construction loans - single-close and construction-only loans.

Single-close will automatically convert into a permanent mortgage after the project is over, and construction-only loans will require you to close on a permanent mortgage again after the construction.

Want to know more? Read our guide on how construction loans work.

As far as we’re concerned, most people shouldn’t use a construction loan to pay for a renovation, for the simple reason that better options now exist.

Fannie Mae HomeStyle Renovation Loan

Before RenoFi Loans came along, Fannie Mae HomeStyle Renovation Loans were one of the most common ways for homeowners to buy and renovate in a single loan.

In fact, these government-sponsored construction loans let you borrow based on your home’s after renovation value, up to a maximum of 95% (just be aware that you’ll need to pay Private Mortgage Insurance (PMI) if you go above 80%).

And while these loans let you spread repayments up to 30 years, they typically come with costs that make them one of the most expensive ways to borrow on the market from a fees perspective.

FHA 203k Renovation Loan

FHA 203k Renovation Loans are an alternative to Fannie Mae HomeStyle loans, being sponsored instead by the FHA, another government agency.

And one thing to point out is that, due to their affiliation with the FHA, the credit score requirement of these loans are typically lower than other types (making them the best way to borrow if you have a poorer credit score), as well as the ability to borrow up to 96.5% of a property’s future value.

But these loans require FHA mortgage insurance upfront and for the duration of the loan.

Why Take Out A Home Improvement Loan?

The right type of home improvement loan can make it possible for you to tackle your entire renovation wishlist today, rather than having to wait 10+ years to build up sufficient equity to borrow based upon this.

Just think about it this way.

You’ve recently bought a new house but have a list of renovations you want to undertake to make it your forever home; the perfect space for you and your family.

This makes total sense. After all, if you’re buying a house in 2021, there’s every chance that the property is at least 40 years old and has elements that you want to change or update.

But renovations are expensive, especially when you want to remodel the whole house in one go.

You have three options:

1. You reduce the scope of your project and renovate room-by-room, and project-by-project, over many years, living in a never-ending construction-zone in the process (however, doing so increases the cost of renovating as contractors give better rates on larger projects).
2. You wait until you have built up sufficient equity and make do with your house in its current form, knowing that this will likely take 10 years or more. All while your children quickly grow up around you.
3. You take out a renovation loan today and have access to a loan amount that lets you tackle everything on your wishlist right now, enjoy your perfect home with your family and make affordable monthly repayments.

You only raise your family once, and a home improvement loan could help you to do so in a home that best suits your needs.

How to Use a Home Improvement Loan

You can use a home improvement loan for any type of home renovation project.

Here are some of the top projects that we see people use RenoFi Loans for, and how much they cost:

Are Home Improvement Loans Tax Deductible?

One of the questions that’s most commonly asked about home improvement loans is whether or not the interest is tax-deductible.

Typically, home improvement loan interest is tax-deductible when:

• Your loan is secured against your home.
• This is used to carry out substantial improvements that add value, prolong its useful life, or adapt it for a new use.
• The loan amount doesn’t go above $750k for a married couple or $375k for a single borrower.

(This information is designed to provide general information regarding the subject matter covered. It is not intended to serve as tax, legal, or other financial advice related to individual situations. Because each individual’s tax, legal, and financial situation is different, you should seek advice based on your particular circumstances from your own accountant, attorney, and/or other advisor regarding your specific situation.)

When looking at the options above, this means that interest is tax-deductible on RenoFi Loans, construction loans (including Fannie Mae HomeStyle loans and FHA 203k loans), home equity loans and lines of credit and cash-out refinances.

You cannot deduct the interest paid on a personal loan or credit card that is used to pay for home improvements.

Try our loan calculator to see how much you could borrow, schedule a call or chat online with one of our team who are on hand to help you to understand your options and answer any questions that you might have.

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