What Is a Home Improvement Loan?

How to Pay for Home Renovations

A home improvement loan is a way to finance home renovations. You typically get a home improvement loan by borrowing against the value of your home’s equity.

You can also use credit cards or a personal loan to pay for home renovations. These types of loans typically have higher interest rates compared to loans secured by the value of your home.

Types of Home Improvement Loans

• Cash out refinance: A cash out refinance replaces your current mortgage with a new mortgage of a larger loan amount, and you get the difference between those amounts, in cash, when the loan closes. You can use the cash you receive from a cash out refinance for home improvement projects.
• Home equity loan: Home equity loans are second mortgages, based on the value of your home’s equity. Similar to a cash out refinance, you’ll receive a lump sum of money when the loan closes, and you can use that money to finance your home renovation.
• Home equity line of credit (HELOC): A HELOC is a credit line, offered by a lender, that’s based on the value of your home equity. You can get cash from this line of credit, which can be used for your home improvement projects as one lump sum, or you can make several withdrawals over time.
• Personal loans and credit cards: You can also make home improvements with loans that are not secured by the value of your home. These loans can have higher interest rates and different financial requirements compared to loans secured by your home.

What Can You Use a Home Improvement Loan for?

Common home improvement projects include renovating kitchens and bathrooms, finishing basements and attics, adding a deck or patio, building a garage, and making major repairs to roofs, foundations, HVAC systems, and plumbing and electrical systems. People typically use these loans for large, expensive projects.

For the kinds of home improvement loans listed above, you aren’t limited to spending the money on just your home. You can also use a portion of the cash to consolidate debt, pay for college, or start a business.

When Should You Consider a Home Improvement Loan?

The most important factor is whether or not you are able to afford a home improvement loan. Average costs of home renovation projects vary, and, therefore, the size of the loan you need may also vary. Learn more about how much home renovations cost.

If you are financing improvements with a cash out refinance, home equity loan, or a HELOC, you should also consider how much equity you have in your home. You, typically, cannot borrow the full value of your home equity, so it’s important to estimate whether the amount will cover the home improvement projects you have in mind.

If you know you eventually want to sell your home, completing renovations can increase your home’s value in addition to improving your quality of life.

What Credit Score Is Needed for a Home Improvement Loan?

Every lender has their own credit score guidelines for cash out refinances, home equity loans, HELOCs, and personal loans. According to Experian , unsecured loans, like personal loans and credit cards, often require a higher credit score. This is because personal loans do not use collateral (like your home) to secure the loan.

At Freedom Mortgage, when you want a cash out refinance using a Conventional loan, we can often accept a minimum credit score of 620. For cash out refinancing with VA and FHA loans, we can often accept a minimum credit score of 550.

Are Home Improvement Loans Tax Deductible?

Certain aspects of home improvement loans are tax deductible under specific circumstances, but not all. For example, cash out refinances may qualify for a tax deduction. Learn more details about tax deductions and cash out refinancing.

What Is the FHA 203(k) Rehabilitation Program?

The Federal Housing Administration’s 203(k) loan program helps homebuyers and homeowners pay for home renovations. Homebuyers can use the 203(k) program to finance the purchase of a home and pay for repairs. Homeowners can get financing for home rehabilitation as well. You can learn more about the 203(k) rehab program here. Freedom Mortgage does not offer 203(k) loans to its customers.

Freedom Mortgage is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions and consult a tax advisor regarding tax implications and the deductibility of mortgage interest.

Last reviewed and updated January 2025 by Freedom Mortgage