Home improvement loans and your credit report
Do you need funds immediately?
When you need an emergency home repair and don’t have time for a loan application, you may have to consider a personal loan or even a credit card.
- Can you get a credit card with an introductory 0% APR? If your credit history is strong enough to qualify you for this type of card, you can use it to finance emergency repairs. But keep in mind, if you’re applying for a new credit card, it can take up to 10 business days to arrive in the mail. Later, before the 0% APR promotion expires, you can get a home equity loan or a personal loan to avoid paying the card’s variable-rate APR
- Would you prefer an installment loan with a fixed rate? If so, apply for a personal loan, especially if you have excellent credit
Just remember that these options have significantly higher rates than secured loans. So you’ll want to reign in the amount you’re borrowing as much as possible and stay on top of your payments.
Your credit score and report always matter when you’re applying for financing. That’s true for secured loans, like cash-out refinances and HELOCs, as well as personal loans and credit cards.
When you have excellent credit, you improve your chances at getting low interest rates — with or without a secured loan.
A lower credit score will increase your loan rates significantly for personal loans or credit cards. Some personal loans charge up to 35% APR to less qualified borrowers.
Some unsecured loans also require high origination fees — a few lenders charge up to 6% of the loan amount in fees.
Using home equity on non-home expenses
When you do a cash-out refinance, a home equity line of credit, or a home equity loan, you can use the proceeds on anything — even putting the cash into your checking account.
You could pay off credit card debt, buy a new car, or even fund a two-week vacation. But should you?
It’s your money, and you get to decide. But spending home equity on improving your home is often the best idea because you can increase the value of your home.
Spending $40,000 on a new kitchen or $20,000 on a new bathroom could add significantly to the value of your home. And that investment would be appreciated along with your home.
That said, if you’re paying tons of interest on credit card debt, using your home equity to pay that off would make sense, too.
Home improvement loans FAQ
The best type of loan for home improvements depends on your finances. If you have a lot of equity in your home, a HELOC or home equity loan might be best. Or, you might use a cash-out refinance for home improvements if you can also lower your interest rate or shorten your current loan term. Those without equity or refinance options might use a personal loan or credit cards to fund home improvements instead.
That depends. We’d recommend looking at your options for a refinance or home equity-based loan before using a personal loan for home improvements. That’s because interest rates on personal loans are often much higher. But if you don’t have a lot of equity to borrow from, using a personal loan for home improvements might be the right move.
The credit score needed for a home improvement loan depends on the loan type. With an FHA 203(k) rehab loan, you likely need a 620 credit score or higher. Cash-out refinancing typically requires at least 620. If you use a HELOC or home equity loan for home improvements, you’ll need a FICO score of 660-700 or higher. For a personal loan or credit card, aim for a score in the low- to-mid 700s. These have higher interest rates than home improvement loans, but a higher credit score will help lower your rate.