Best Home Improvement Loans for 2016

Finance your home improvement project to increase your equity.

Whether you want to make a few simple upgrades or construct a pricey new addition, if you don’t have money saved for the project, you’ll want to figure out the best home improvement loan for your situation. Real-estate experts agree that wisely chosen upgrades can pay off in a heftier home value in the long run, but your first step is to make sure you can afford the updates you want to make.

Featured Home Improvement Loan Companies


When you have equity in your home, it’s relatively straightforward to get the funds you need. Using the equity on your home as collateral means you can get a lot of funds for a low APR — but that assumes you have equity in the first place (and don’t mind putting your house on the line).

However, since 2008, many homeowners are still underwater on their homes, yet truly need to make some good upgrades to get back in positive equity territory. So line of credit loans from LightStream offer unsecured options that don’t require your home equity as collateral; instead, most are backed by your personal income and credit history.

The Simple Dollar’s Top Picks

However you finance your home improvements, there are pros and cons to consider that I’ll cover later in this article. For now, here’s a peek at my picks for the best home equity loans and best home improvement loans:

Below, I profile these lenders as well as a handful of others who might be good options in your search for home improvement financing. I’ll discuss the positives and negatives associated with home equity loans, home equity lines of credit, and personal home improvement loans, as well as tips to keep in mind when you’re looking for funding.

The Best Home Equity Loans

#1: LendingTree

LendingTree isn’t a direct lender — rather, you describe the type of loan you’re looking for and will receive offers from potential lenders. That makes it easy to obtain several potential APRs at once, which can certainly help while you’re shopping around. But LendingTree really shines with a lot of educational articles for borrowers that detail the basics of home equity loans and HELOCs, their pros and cons, financial impact, and other important information. Some borrowers complain that they received too many calls from banks after submitting their request, however.

Pros

  • Low APR quotes
  • Solid customer service scores
  • Saves you time by providing multiple range of competitive quotes
  • Fees and terms clearly disclosed
  • Website is a good educational resource

Cons

  • Borrowers say they receive too many calls from banks
  • Not a direct lender

#2: U.S. Bank

U.S. Bank edged out its competitors largely because of low APRs and the transparency of its website. For a 20-year, $75,000 fixed-rate loan on a home in Knoxville, Tenn., I was quoted a competitive 6.19% APR. I received a 3.99% variable APR quote for a 10-year draw, 20-year repayment $75,000 HELOC. Both rates were among the most competitive that I saw.

What really set U.S. Bank apart was the transparency of its website. As soon as I received my rate quotes, I was able to easily read all important disclosures about rates and fees without clicking any small-print links or searching for the information on other pages. U.S. Bank could do a better job of educating borrowers on the ins and outs of home equity loans, however.

Pros

  • Low APR quotes
  • Solid customer service scores
  • Nearly 3,200 branches nationwide
  • Will waive HELOC annual fee with checking account
  • Fees and terms clearly disclosed
  • No early closing fee on HELOCs for higher debt-to-income borrowers
  • Online chat service among contact options

Cons

  • No low promotional rates on HELOCs
  • Website features little to educate customers on home equity

#3: Bank of America

Bank of America offered a 4.15% APR on my HELOC, just slightly higher than U.S. Bank. I was quoted a low 5.4% APR for my fixed-rate home-equity loan, but that assumes a 25-year term. I couldn’t change the term on Bank of America’s rate generator to make apples-to-apples comparisons and see how longer or shorter terms affected my rate, a substantial annoyance.

It was relatively easy to find important disclosures about rates and fees by clicking on a “home equity assumptions” link from the quote results page, and the $450 home-equity loan prepayment fee was a bit lower than U.S. Bank’s $500 fee.

One unique feature of Bank of America’s fixed-rate loans was a three-year term (typically you can borrow for a minimum repayment term of five years). The bank’s chat service and more than 5,000 branches also make convenience a strong point.

Pros

  • Low APR quotes
  • More than 5,000 branches nationwide
  • Offers rare three-year term for fixed-rate home equity loans
  • Fees and terms clearly disclosed
  • Online chat service among contact options

Cons

  • No low promotional rates on HELOCs
  • Mediocre customer service ratings
  • Rate generator doesn’t allow you to change loan’s repayment term
  • High 24% rate cap on HELOCs

Runners-Up: Citibank

Citibank gave me slightly higher quotes — 6.67% APR for the fixed-rate loan and 4.63% for the HELOC — than several competitors. Its $200,000 fixed-rate loan borrowing limit is also fairly low, since most competitors allow home-equity loans up to $500,000. But Citibank makes up for this by offering a higher HELOC allowance (up to $1 million) and one of the easiest-to-use rate calculators I saw. Disclosures are very easy to find, but there were few FAQs specific to home equity loans.

The Best Personal Home Improvement Loans

#1: LightStream

It’s hard to beat the APRs offered by LightStream, a division of SunTrust Bank. For home improvement purposes, LightStream’s APRs range from 4.99% to 9.24% — very low for unsecured loans and not far off from traditional home equity loans. Lightstream also makes loans up to $100,000, a high limit for unsecured loans and potentially useful for home improvement purposes. There are no fees other than interest, either.

The main downside is that you’ll need to meet high standards to qualify. Criteria include excellent credit, substantial income, and a history of responsible saving. You also won’t be able to cheat and use a Lightstream loan for something other than home improvement, whereas most lenders allow unsecured personal loans to be used for anything.

Pros

  • Low APRs for unsecured loans
  • Very high $100,000 borrowing limit
  • No fees other than interest
  • Repayment terms as long as seven years
  • Quick turnaround can mean receiving funds in as little as a day

Cons

  • Borrowers must have excellent credit and meet other strict criteria
  • Higher loan minimum of $5,000
  • Loan cannot be used for purposes other than home improvement

#2: Avant

If your credit isn’t good enough to get loans with LightStream, Avant could be worth a look. This direct lender’s criteria focuses on a lower minimum qualifying credit score, making this product more available to riskier borrowers. As a result, APRs start at 9.95%, which is higher than most lenders and loans go up to $35,000.

Avant charges no origination fees and can get funds to you quickly, and you can use the money for home improvement or anything else. It’s also available to borrowers in all but four states (Iowa, Maine, North Dakota, West Virginia). Avant is a startup, so it might not appeal to you if you’re nervous about new companies.

Pros

  • Quick funding approval process
  • Doesn’t charge origination fee
  • Accepts borrowers with lower credit scores
  • Offers flexible loan payment deadlines

Cons

  • Higher starting APRs than most lenders
  • Lower overall loan maximum of $35,000
  • Start up company without proven track record

Runners-Up: Wells Fargo and Prosper

Wells Fargo has more than 8,700 branches nationwide is among your best big-bank options for personal home improvement loans. Rates start at a low 6.78%, and like Lightstream, it will approve loans up to $100,000 with no origination fees. You can choose repayment terms as short as a year and as long as five years. However, you won’t be able to apply online unless you already bank with Wells Fargo, which also gets poor marks for customer service.

Peer-to-peer lender Prosper can lend up to $35,000 for small home improvement projects. These personal loans are unsecured, meaning no home equity or other collateral is required to get a loan. APRs begin at 5.99% for the most credit-worthy borrowers, who can choose repayment terms of either three or five years. Rates and fees are clearly disclosed and easy to understand, and the lending process is typically faster and less stringent than it is through big banks. You still may wait up to two weeks for funds to be available, however.

Financing Your Home Improvement Project

Assuming you don’t have enough cash stashed in savings to fund your home improvement project, you’ll need to get funds somewhere. There are a few ways to get the cash you need without resorting to high-APR credit cards: home equity loans, home equity lines of credit, and personal home improvement loans.

Home Equity Loans

Many people think home improvement loans and home equity loans are synonymous, but that’s not the case. Unlike a standard personal home improvement loan, a home equity loan is secured with the equity in your home — that’s the difference between the market value of your home and what you owe. For example, if your home is worth $450,000 and you have $150,000 left on your mortgage, that means you have $300,000 in equity. Most lenders will calculate 80% of your home value and subtract your mortgage balance to figure out how much you can borrow. In our example, 80% of the home’s value would be $360,000. Take away $150,000 and you could borrow up to $210,000.

If you have a lot of equity, home equity loans can be a compelling option for borrowers who need to make costly home improvements. If you have a lot of equity to borrow against, you could receive a lump sum large enough to complete your remodeling project and then some — in fact, some lenders won’t make home-equity loans smaller than around $20,000. You may be able to nab a lower APR than you’d receive on a personal home improvement loan. Your APR will be fixed, so you’ll make the same payments for the life of the loan, and you’re even able to deduct the interest from your taxes in many cases.

Of course, you need to have equity in the first place in order to consider a home equity loan — that simply isn’t the case for many homeowners who either haven’t been in their home very long or have been hit with a decline in home value. Another con of home equity loans is that they put your home at risk if you fall behind on payments. You’ll also need to pay closing costs and fees similar to those on your primary mortgage. They can add up to 5% to 6% of your loan, and the closing process can take weeks.

When to Consider a Home Equity Loan

To summarize, consider a fixed-rate home equity loan if:

  • You have enough home equity to borrow against.
  • You need a one-time loan for a single project.
  • You want the security of a fixed interest rate, even if that means the rate might be a bit higher.
  • You want to be able to budget for the same payment each month.

Home Equity Lines of Credit (HELOCs)

HELOCs are the more flexible sibling of home equity loans. They work kind of like credit cards in that you can use the funds from your HELOC repeatedly as long as you stay under your borrowing limit. This makes it a compelling choice if you’re embarking on a long-term home renovation and you aren’t sure exactly how much money you’ll need or when you’ll need it — contrast this with personal home improvement loans and home equity loans that pay out a lump sum. If you don’t manage that money wisely, you’re out of luck. Interest is also tax-deductible with HELOCs, and fees generally aren’t as steep as they are with home improvement or home equity loans.

The biggest drawback to a HELOC is the variable APR. Because your interest rate isn’t locked in, it could rise substantially, and that can make it tricky to budget for repayment. And while most HELOCs allow you to pay only interest while you’re drawing funds from the line (this is called a “draw period,” commonly 10 years), that means you’ll be hit with much higher payments down the road. If you don’t plan for it, you can get in financial trouble very quickly. And again, like a home equity loan, getting a HELOC assumes you have equity available in the first place.

When to Consider a HELOC

To summarize, consider a HELOC if:

  • You have enough home equity to borrow against.
  • You need ongoing access to funds over a longer period of time.
  • You are willing to accept the risk that your low interest rate may rise.
  • You can budget for a steep rise in payments if you pay back only interest during your HELOC’s initial draw period.

Home Improvement Loans

Home improvement loans are simply run-of-the-mill personal loans used for a home improvement project. Like home equity loans, they have a fixed interest rate and are repaid over a set period, often three to five years.

Lenders offer both unsecured and secured loans of this type. If you opt for an unsecured loan, you won’t need collateral to obtain a loan, but you’ll probably need very good credit to receive a low APR. If your credit isn’t so hot, you may be able to get a secured loan by offering collateral such as your car. This will keep your APR lower than what it would be on an unsecured loan, but your interest rate is probably still going to be in the double digits.

Personal loans for home improvement purposes have an appealing simplicity. Depending on your lender and their approval process, you can have funds fairly quickly. You may pay an origination fee (up to 5% or 6% of your loan), but you won’t have most of the closing costs and fees associated with home equity loans.

The major downside is that you may not be approved for the amount of money you need, depending on your home improvement project. Many lenders will cap personal loans around $30,000 or lower, though this may not be a con if your project is small. Your chances of getting a large amount will be better at a big bank, but qualifying is usually tougher, too.

Title I Government Loans

One home improvement loan program worth investigating is the Title I program, underwritten by the federal Department of Housing and Urban Development (HUD).

The government is not the direct lender for these loans. Rather, it guarantees that lenders will be repaid a certain amount if you default. That translates into lower APRs and broader lending criteria, making these loans a good place to look if your income or credit makes qualifying elsewhere tricky. Note that loans are capped at $25,000, and you’ll be prohibited from making certain “luxury” upgrades with Title I loans such as pools, spas, or landscaping.

When to Consider a Personal Home Improvement Loan

To summarize, consider a personal home improvement loan if:

  • You don’t have enough home equity to borrow against.
  • You understand that your interest rate will be closely tied to your credit score, and will probably be higher than rates on home equity loans and HELOCs.
  • You need a one-time loan for a smaller, single project.
  • You want to be able to budget for the same payment each month.

How to Shop for Home Improvement Loans

Shopping for the best home improvement loans isn’t only about getting the best interest rate. It’s also about making sure you’re only borrowing what you need for a reason that makes sense. Here are several things to consider before signing on the dotted line.

Borrow the Right Amount for the Right Reasons

Before you search for home improvement loans, remember to evaluate your reasons before taking the plunge. You’ll want to focus on projects that will pay for themselves when you sell your house.

For instance, a kitchen upgrade is usually a wise bet, but sinking money into your home office might not make much sense.

Along the same lines, ask yourself how much you realistically need for your project. While it’s wise to allow for inevitable costly surprises, you’ll need to comfortably afford your loan payments.

In other words, even if you can borrow $200,000 in equity, that doesn’t mean you should. Banks are notorious for approving people for more than they need, and that is how a lot of people have gotten into financial trouble. This is especially true with HELOCs, which usually allow you to make low interest-only payments for an initial term. Too many people fail to budget for the much heftier payments that await down the line.

Rigorously Shop Around

Your shopping strategy may vary depending on how you’ve decided to finance your home improvement project, but one thing is certain: Never sign on the dotted line the first place you look. Do see whether your primary mortgage lender will offer a good deal on a home equity or home improvement loan to keep your business. But don’t assume they’ll offer you the best deal without looking around, even if it is easier to stick with the lender you know.

Consider using a tool such as LendingTree or PersonalLoans.com to solicit multiple offers at once and save yourself some legwork. Also remember to check out your local credit unions, which may have more time to sit down with you, listen to your request, and cut you a better deal than a bigger bank.

Make Sure Your Credit is Solid

Your credit score will be a bigger factor in lenders’ decisions if you’re looking for the best home improvement loans instead of home equity loans or HELOCs. That’s because you aren’t securing the loan with your home equity, which means the loan is riskier for your lender to make. (You can look into securing the loan with other options, however, such as a car or other high-value personal property.)

Improving your credit is not quick, but a good credit score can save you so much that it’s worth the effort. Some online lenders won’t even consider your application if it’s below the mid-600s.

If you just squeak by with average credit, you could be paying an APR around 30% for an unsecured loan with peer-to-peer lenders such as Lending Club and Prosper. But with excellent credit (assuming other finances are up to snuff), you could get an APR in the single digits.

If that’s too abstract, consider this: If you get a $15,000 loan at a 30% APR and pay it off over five years, the loan will actually cost you $29,118. Borrow the same amount for the same term at 8%, and the loan will only cost you $18,249 – a savings of over $10,000.

Remember to Consider the Long Term

If you think there’s any chance you’ll want to sell or rent your house before you can comfortably pay off a home equity loan or HELOC, carefully consider using your equity to finance home improvements. Just like your primary mortgage, you’ll need to pay off both kinds of financing when you sell.

That might not be a problem if the sale of your home fetches enough to pay back all your debts and then some, but a big home equity loan could also mean you take away little — or nothing — from the sale. Also note that it’s common for some home equity lenders to prohibit you from renting out your house as long as you have your loan.

Compare Fees, Not Just Interest Rates

When you’re looking for the best home improvement loans, it’s easy to fixate on the lowest interest rate you can find. But be sure to factor in other costs, both financial and non-financial.

For instance, remember to consider the fees associated with home equity loans and HELOCs, because they can add up. Some personal home-improvement loans may have hefty origination fees and some may not. Late-payment fees are likely to apply with all your options, too.

One particular fee to watch for is a prepayment fee. These are less common with personal home improvement loans, though you’ll still want to make sure you confirm there’s no early-payment penalty before signing for a loan. You’ll want to be on guard a bit more with home equity loans, where a prepayment fee can be either a percentage of your remaining loan balance or a set number of months of interest. If your lender does charge a prepayment fee, it doesn’t hurt to ask whether they can drop it in order to keep your business.

How I Picked the Best Home Improvement Loans

To pick the best home equity loans, I focused on lenders with a wide geographical reach that offered at least one fixed-rate home equity loan and one HELOC. I looked for a range of competitive APRs and considered the quote I received on a $75,000 loan with the following criteria: a home value of $350,000; $150,000 left on the mortgage; located in Knoxville, Tenn.

I evaluated how hard it was to find disclosures about rates and fees for each product and whether fees were low or high compared to others. Finally, I looked at J.D. Power’s 2014 Retail Banking Study for a measure of customer service performance.

To pick the best home improvement loans, I focused on loans with high maximums and relatively low APRs available to good-credit borrowers (both criteria loosened somewhat in the case of lenders that focus on borrowers with average credit). I examined fees, terms, and other restrictions, as well as how clearly lenders disclosed this information on their websites. Lenders had to have substantial geographical reach. Though it was a minor consideration, I also looked at the lender’s longevity, standing with the Better Business Bureau, and online reviews.

Finding the Best Home Improvement Loans

Before you get started on your search, remember to evaluate whether the improvements you want to make will be worth it, especially if you know you won’t be in your current house long term.

If you’re still set on your project, take a careful look at how you want to finance it. Borrowing against your home equity will probably be your cheapest option as long as you have enough equity and are certain you won’t put your home at risk by missing payments. But in certain other cases, personal home improvement loans make sense — just do your homework so you know potential pitfalls beforehand.

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