How Do Home Improvement Loans Work?
The term home improvement loan can describe a few different financial products. Personal loans for home improvement (secured and unsecured), home equity loans, and home equity lines of credit are three popular options.
Though all three of these loans have different features, they also have something in common. If you qualify for financing, a lender will lend you the money you can use toward a home improvement or repair project. In exchange, you’ll repay the money you borrowed, along with interest and possibly fees, over time.
Many home improvement loans are reported to the three credit bureaus. It’s important that you consistently make your payments on time if you want to protect your credit scores. And doing so can help them, of course.
Once you decide to borrow money for home improvements, there are numerous lenders who may be able to help you: online lenders, banks, and credit unions.
Are Home Improvement Loans Tax Deductible?
The Tax Cuts and Jobs Act changed many of the deductions that were once available to taxpayers. Yet, according to the IRS, the interest paid on home equity loans, home equity lines of credit, and second mortgages may still be deducted from your taxes in many cases.
To deduct loan interest from your taxes, the funds you borrowed must have been used to “build or substantially improve” the home that secures the loan. All the loans described above are secured loans.
Therefore, if you use an unsecured loan to fund your home renovation, you might not be able to deduct the interest you pay. Confirm your situation with an accountant, tax attorney, or other tax advisor.
Can I Borrow More On My Mortgage for Home Improvement?
A mortgage is a type of installment loan. Unlike revolving credit cards and credit lines that let you borrow money, pay it back, and borrow again, an installment loan is issued in a lump sum. You can’t go back to your lender and ask for more money on your existing mortgage—for home improvements or for anything else.
You can, however, consider a cash-out refinance. With a cash-out refi, you apply for and (if approved) take out a new loan to pay off your existing mortgage. Assuming the equity in your home has increased, you may walk away from the closing table with some extra funds in your pocket.
Imagine you owe $150,000 on a home that’s worth $250,000. If you have good credit and can satisfy a lender’s other requirements (income, employment, debt, etc.), you might be able to borrow $200,000 in a cash-out refinance. Once your existing mortgage of $150,000 is paid off, you could use the extra $50,000 toward your home improvement project.
Note: Refinancing your mortgage isn’t always a great idea, so weigh the pros and cons before taking this step.
The Bottom Line
Terms and conditions of home improvement loans vary a great deal, depending not only on the lender, but on the borrower's credit score and history, and the sums of money involved. No matter what sort of financial shape you're in, there's probably financing available to you. But, regardless of which type of loan you’re considering and what type of lender you want to work with, shopping around will help you make sure that you’re getting the best rate and terms on your home improvement loan.
