Pros and cons of home improvement loans

How they compare with a home improvement loan: A home equity loan might be significantly less expensive if you have enough equity in your home, few other debts and an especially big project to fund. A HELOC might offer a more flexible way to regularly pay for home renovation costs, especially if you don’t know exactly how much you’ll need in the end. Consider a home improvement loan for less expensive jobs. That’s because both home equity loans and HELOCS often come with minimum loan amounts, like $10,000 for HELOCS, or $25,000 for a home equity loan.

FHA Title 1 Loans

A FHA Title 1 loan is a home renovation loan that’s issued by a bank or other lender but which is insured by the Federal Housing Administration. You can use it for any project that makes your property more livable or energy efficient, as long as the upgrade is a permanent part of your home and isn’t a luxury item. That means replacing a plumbing system or a built-in appliance will probably qualify, but not installing a swimming pool or outdoor fireplace. For small loans ($7,500 or less), you won’t need to put up collateral.

To qualify for an FHA Title 1 loan, you won’t need a minimum income or credit score, but a lender will look at any outstanding debts you have, your payment history and whether your income is large enough to pay off the loan. To find an approved lender, check this page on the HUD website .

How it compares with a home improvement loan: Because of the federal guaranty, lenders generally offer lower interest rates for FHA Title 1 loans than on home improvement loans, and the rates are similar to those for home equity loans. You might find it easier to qualify for this type of loan than for a personal loan, but for single-family homes, FHA Title 1 loans are capped at $25,000. If you think your home improvement will be extensive – and are looking at more than basic upgrades – a personal loan might serve you better.

Credit cards with a 0% interest introductory offer

Some lenders offer balance transfer credit cards that let you avoid paying interest for a certain amount of time – often up to 18 months – as long as you pay back your balance in full by the time your grace period is over. However, if you’re still carrying a balance at that time your card will be charged a relatively high interest rate.

How it compares with a home improvement loan: A balance transfer card could be an excellent way to pay for a home improvement – if you could manage to pay off the balance before the introductory period expires. But home improvement costs can often be as unpredictable as they are large, so this might not be a realistic option for most borrowers.

In general, credit cards – with variable interest rates that are typically high – qualify as the most expensive way to finance a home improvement. Using a credit card to pay for a home improvement could throw you into an endless cycle of debt. You’re far more likely to get a lower interest rate and peace of mind with a home improvement loan, especially if you have strong credit, a good income, and relatively few other debts.

As with personal loans, fees for both home equity loans and HELOCS could potentially add up. For a home equity loan, expect closing costs similar to what you paid for your mortgage. Still, the interest you pay on both these financing alternatives is often tax-deductible. That’s not the case with personal loans.