Apr 4. 2025 U.S News
Sometimes the need to renovate or repair a home comes at an inconvenient financial moment, and a homeowner needs some help paying for it. That help could be a home improvement loan, which can cover projects ranging from kitchen or bathroom upgrades to emergency repairs.
It’s tempting to heed the marketing hype from your bank or another institution, but is a home improvement loan a smart loan? And is one that much different from any other personal loan?
The short answer: As with any loan, it may be a good idea or it may be a terrible one, though likely it will be somewhere in between. It always depends on the details. If you’re considering a home improvement loan, here are answers to some of the questions you may have.
Is a Home Improvement Loan Different Than Any Other Loan?
Is there something special about a loan when it becomes a home improvementloan?
Not really, says Jeremy Schachter, a branch manager at Fairway Independent Mortgage Corp. in Phoenix.
“Banks and lenders promote home improvement loans as a specific type of loan, but truly, it is the same type of home equity loan or line of credit you can take out. The funds are just being used for a home improvement,” Schachter says.
Home equity loans can be used for home improvement, but you could also use the money for a college education, a vacation or buying a car, he says. However, most financial experts will suggest using a home equity loan for home improvements instead of a vacation (while the memories last a lifetime, the experience itself is pretty short) or a car, which immediately depreciates. At least when you use a home equity loan for home improvements, you’re adding value to the asset.
What Kind of Home Improvement Loans Are There?
Yes, yes, we just said home improvement loans are essentially like any other loan, but there are different types of loans that you can take out, and they’re not all created equal.
Some of the types of home improvement loans include:
- Secured loans. These are home equity loans or any loan in which an asset is tied to what you’re borrowing. “These loans enable homeowners to borrow the most money at the lowest possible rate and longest possible term because they give homeowners the benefit of what their home will be worth post-renovation,” says Justin Goldman, CEO of RenoFi, a home renovation loan website. Still, any time you take out a loan with collateral, you really need to be sure you can pay the loan back, lest you lose your asset.
- Unsecured loans. “They have shorter terms, higher rates and lower loan amounts than secured loans, but they have the benefit of closing faster,” Goldman says.
- Contractor financing loans. “These are the same as the unsecured loan, but the contractor is paying the financing company for the right to offer the loan,” Goldman says. “They typically have some sort of attractive teaser rate like 0% APR for 12 months.” But there’s often a downside, according to Goldman. “There is a hidden cost to these, though, as most contractors simply pass on their cost to the homeowner by increasing the cost of the project,” he says. “So when a homeowner thinks they are getting free financing, they are really paying for it without realizing.”
Pros and Cons of Home Improvement Loans
This is always a great question to ask yourself before taking out any loan. Here are the general pros and cons of home improvement loans:
Pros:
- You’re improving your home. Whether you’re thinking of fixing up your house so you can sell it or to make living there more comfortable or pleasant, some home projects not only upgrade your home but may also prevent it from falling apart. You may not need a kitchen renovation, but if your home is leaking and you’re at risk of water damage, a new roof may be a necessity.
- You’re adding value to your home. “Any kind of home improvement project that will add value to your home would be encouraged, such as adding on an additional room or remodeling a bathroom. You might not get a dollar-for-dollar return on the project, but it will definitely add value,” says Aaron Craig, a vice president of mortgages and indirect sales at Georgia’s Own Credit Union in Atlanta.
- The loan may be affordable. Echoing what Goldman said, Craig says that if it’s secured to your home, like a home equity loan, it “typically has lower interest rates as well as longer payback terms.” He also says you could be eligible for a tax deduction on the interest you pay on a home improvement loan, so consult with your tax advisor.
Cons:
- The loan may not be affordable. It depends on what type of home improvement loan you take out. Even home equity loans may be more expensive than you think. “There are usually closing costs associated with obtaining a home improvement loan,” Craig says. He says they’re generally minimal and can usually be rolled into the loan, but you still want to be aware of them.
- You could lose your home. If it’s a home improvement loan with your house as collateral, and if you can’t repay the loan, you could lose your home.
- Home improvement loans can take time to get approval. If it’s tied in with your house, Craig says it might take longer to get approval than a car loan or an unsecured personal loan, for example. Generally, Craig says, “This isn’t a big deal unless you are under a tight deadline and need the money quicker.”
What Home Improvement Loans Should I Steer Clear From?
In many ways, all loans are subjective. What one person likes, another hates. Schachter says some banks offer home improvement loans that are essentially consumer loans.
“A consumer loan usually is not tied to your property as a lien and has higher rates due to the risk. So if you default on the loan, it is not connected to your home or equity. This is why consumer loans have much higher rates,” Schachter says. He would advise going with a home equity loan, although some homeowners may prefer a loan that isn’t tied in any way to their home.
“Contractor financing is the one to be wary of,” Goldman says, because they can be expensive.
“Always ask your contractor for a quote with and without financing,” Goldman says. “If taking out a loan with an intro teaser rate, you better be confident you can pay it off in full before the teaser rate expires, otherwise the loan will likely be quite costly.”
While all home improvement projects can technically add value to your home, Craig says paving a driveway or landscaping projects tend to add the least.
“If possible, I would steer clear of doing a home improvement loan for massive outdoor yard projects, unless you are purely wanting them for your use and enjoyment rather than creating additional value in your home,” he says.
It all comes down to a personal choice, but learn as much as you can about each type of loan and its ramifications before you empty out your checking account and sign the paperwork.
