How to Choose the Best Loan for Home Improvement

By Erin Hynes | Oct. 10, 2021 7:36 pm PST

Home improvement financing

When you’re renovating your home, the loan that’s right for you might not be obvious. Some people prefer a short term loan while others choose to refinance their home mortgage to pay for renovations.

If you decide to borrow money to pay for your remodel, there are many types of loans available and it can be hard to know which one is best suited for your situation. Here are descriptions of the different types of home improvement loans and some tips on how to choose the loan that best fits your needs.

Home Improvement Loan Types

It’s important to understand what each type offers before making any decisions about financing your renovation project. Here’s a rundown of the different types of home improvement loans.

Personal Loan

A personal loan lets you borrow the amount you need for your remodel for a set amount of time—allowing you to pay back the loan in monthly payments. The lender charges interest on the loan, so your monthly payments include portions to repay the loan and interest.

Credit Card

Using a credit card to pay for is a good idea when you’ll be able to pay the remodel bill off quickly and when you can get a promotional rate.

For example, a qualifying Sears or Shop Your Way credit card* offers no interest if paid in full within 18 months** on heating and cooling replacement, kitchen and bathroom remodel, siding, windows, roofing, cabinets, countertops and flooring home improvement purchases over $1,500*** through Sears Home Services.

(Terms and conditions can change at any time, so check with your Sears Home Improvement Consultant regarding Sears and Shop Your Way credit card offers when considering financing options.)

Paying for renovations using a 0% promotional interest rate is the best financing path to choose for many home improvements.

Home Improvement Loan

A home improvement loan often offers competitive interest rates but it requires you to have good credit scores. Like a personal loan, you’ll borrow the amount you need for your remodel for a set amount of time and pay back the loan with interest in monthly payments.

Cash-out Mortgage Refinance

A cash-out refinance involves obtaining a new mortgage for your home for a cash amount higher than your existing mortgage loan’s payoff. When you close on the new mortgage, you’ll receive a check for the difference between your new mortgage amount and the payoff of your existing mortgage. You’ll use the funds from that check to pay for your remodel. You’re essentially adding the cost of your remodel to a new home mortgage that you’ll pay off over time.

Home Equity Loan

A home equity loan is a type of personal loan that you can take out against the value of your home. You use the equity in your home as collateral to guarantee the loan so a home equity loan often has lower interest rates and is easier to obtain for most homeowners.

Deciding Which Type of Loan to Use for Home Improvement

When deciding which type of loan to use for major renovations, consider these comparisons of loan types.

Home Improvement Loan Versus Personal Loan

A home improvement loan is nearly identical to a personal loan. You’ll often be able to get more money, a lower interest rate and a longer payoff term on a home improvement loan versus a personal loan because the home improvement loan is specifically designated for home renovations.

Compare loans from multiple financing sources and choose the loan that charges the lowest interest rate for the term length that you need.

Home Improvement Loan Versus Refinance

Refinancing your home to pay for renovations often works out well when the remodel is over $20,000 and the interest rate on your new mortgage is at least 1% lower than your original mortgage. It’s not worth paying new mortgage set-up fees to pay for less expensive home improvements. Refinancing your mortgage only makes sense when you can get a new loan at a low enough interest rate on the new mortgage to recover loan set-up fees.

When comparing a home improvement loan versus mortgage to pay for your remodel, keep in mind that refinancing your mortgage can be expensive. Loan set-up fees add up quickly. You’ll typically pay loan application fees, appraisal fees, title search fees and closing costs to set up the new mortgage.

An advantage of a mortgage is that its interest rate is typically much lower than a home improvement loan rate. Also, longer terms are available for a mortgage than terms for home improvement loan. If you need a long time to pay off an expensive remodel, then refinancing your home mortgage is likely the way to go.

Home Improvement Loan Versus Home Equity Loan

If you have enough equity in your home to pay for a remodel costing more than $20,000, and you need more than 10 years to pay off the loan, then getting a home equity load may be the right choice for you.

A home equity loan typically has a much lower interest rate and a longer term than a home improvement loan, but initiation costs of a home improvement loan are similar to fees for a mortgage. You’ll typically need to pay appraisal fees, title search fees and closing costs.

Choose a home equity loan when the total interest and fees that you’ll pay for a home equity loan are less than the total interest you would pay for a home improvement loan.

Carefully considering your finance options can save you money and make it easy to pay for renovations. Choose the type of loan that best fits your particular needs.

*Shop Your Way and Sears credit cards are issued by Citibank, N.A. Trade Licenses for Transform SR Home Improvement Products LLC (in certain states d/b/a Sears Home Improvement Products) at

**With credit approval, for qualifying purchases made on a Shop Your Way or Sears credit card. Sears Home Improvement AccountSM valid on installed sales only. Offer valid for consumer accounts in good standing and is subject to change without notice. May not be combined with other Shop Your Way or Sears credit card offers. Shop Your Way and Sears credit cards: As of 8/15/2021, APR for purchases: Variable 7.24%–25.24% or non-variable 5.00%–26.49%. Minimum interest charge: up to $2. See card agreement for details, including the APRs and fees applicable to you.

***Purchase requirement less coupons, discounts and reward certificates and does not include tax, installation, shipping or fees, and must be made in a single transaction for the service.

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