How much can you borrow with a home improvement loan?

A home improvement loan can be used to finance home renovations and projects. While a full kitchen remodel or new flooring throughout your home can be costly, there are several types of home improvement loans available to help homeowners finance these projects.

However, as with any loan, the terms and rates will vary depending on the type of home improvement loan you select.

How much money can you borrow for home improvements?

The amount you qualify for, as with many personal loans, is determined by your credit score, current debts, and income. Although it can be difficult to estimate the cost of a large project, you must have a good idea of your budget before submitting any loan applications.

The maximum amount you can borrow will also be determined by the type of home improvement loan you apply for.

• Home equity loans and home equity lines of credit (HELOCs) allow you to borrow against the equity you’ve built in your home.
• Personal loans are typically unsecured, relying on your personal finances. They can be used for home improvement, but the amount you can borrow is determined by your credit score.
• An FHA 203(k) loan, also known as a mortgage rehab loan, enables you to borrow for both the mortgage and the renovations of your home in a single loan. This allows you to pay for necessary renovations that you would not be able to afford otherwise.

As a general rule, you should not borrow more than 80 to 90 percent of the value of your home to finance renovation costs. Personal loans typically have a lower threshold, often up to $100,000 at the most — though most lenders limit their maximum amount to $50,000 or less.

Typical loan amounts for home improvements

Home improvement loans typically range from $1,000 for small projects to $100,000 for large-scale projects. Although you may need good credit or a co-signer to qualify for larger loans and lower interest rates, keep in mind that secured loans based on the value of your home, such as a home equity loan, allow you to borrow more.

While some projects, such as roof or HVAC replacement, may have a fairly fixed cost, other renovations may vary depending on your budget and taste. As a result, a HELOC or personal line of credit may be a more flexible and cost-effective option.

What factors influence the amount of money you can borrow?

The amount you can borrow will be determined by the type of loan you apply for; government loans are frequently more stringent than private lender loans. The amount you can typically borrow is determined by:

• The type of loan. Loans that use the equity in your home allow you to borrow more than an unsecured home improvement loan.
• The current market value of your home. If you choose a HELOC or home equity loan, the current value of your property may increase your equity, which may increase the amount you are eligible for.
• Your physical location. Because your location affects the value of your home and the return on home improvement projects, lenders may consider where you live when determining how much you qualify for.
• Your personal financial situation. Lenders consider a number of factors, but your debt-to-income ratio (DTI) and credit score will be the most important.

A home improvement loan isn’t always the best option.

If interest rates on your mortgage have fallen since you borrowed for your home, a cash-out refinance may offer lower rates and better terms than applying for a separate loan to fund your renovation project.

Depending on how urgent your home improvement project is, you might consider saving for renovation costs rather than borrowing to cover them. Improve your budget to avoid paying interest if your project is mostly cosmetic and does not pose any immediate structural or mechanical problems.

Be cautious about how much you borrow.

Use a loan calculator to estimate your monthly payments when considering a renovation or project. You should not only avoid borrowing more than your home is (or will be) worth, but you should also make sure your monthly payments are manageable.

A project budget will also help you plan for the total cost of your renovation. This can make it easier to qualify for the amount you require — or determine whether saving is a better option.

Important takeaways

• There are two types of home improvement loans: secured and unsecured.
• Interest rates are largely determined by the value of your home and your personal finances.
• By creating a project budget, you can avoid borrowing more than you need.
• Compute your monthly payments and interest rates to ensure you are borrowing responsibly and not putting your home at risk.