Get the best home improvement loan for your fixer-upper

You bought a house a few years ago and have been handling some of the little renovation projects yourself. Now it's time to tackle a big upgrade. All the original pipes have got to go, and the plumber's quote gives you sticker shock.

Ideally, you'd have enough in a savings account to cover the cost of this expensive work without adding to your debt. But things don't always work that way, especially with home repairs that can be unexpected and incredibly expensive.

A personal loan for home improvement purposes could be the solution. Even if your lender doesn't specifically identify a home improvement loan among the loans they offer, you'll often be able to identify home repairs or remodeling as the reason you're applying for a personal loan.

How do home improvement loans work?

The short answer is that a home improvement loan typically works the same as any unsecured personal loan. You don't put up any collateral to qualify for it. Therefore, the lender is taking a bigger risk by agreeing to front you the amount. Your side of the agreement is to pay back the amount borrowed, with interest, within a given period. Be sure to read the fine print, as there are some loans branded as home improvement loans that do require the borrower to put up collateral, for example your home, which could be taken away if you're unable to pay back the loan.

The longer answer is that all major financial decisions can affect your overall budget and financial plan, so it's important to consider every financing option against your goals — including your real estate goals. Have a conversation with your Realtor^{See note®} or financial advisor, starting with a few questions: How long do you plan to be in the house? Is the project going to add to the value of the house? Should you create your dream space in your current house, or save up and wait to do it in your forever home in the future?

If you decide that, yes, now is the time to do this project — or if the decision is made for you and a costly repair is necessary, whether you like it or not — keep these home improvement loan pros and cons in mind.

• Pro: Typically no collateral. If you're unable to repay the loan, you typically will not have to pledge collateral — house or other assets — to secure loan repayment.
• Con: Higher qualifications. A good credit score and favorable credit history will make you more appealing to the lender, based on their specific requirements. If you have poor credit, you might not be approved for a personal loan for home improvement.
• Pro: Speedy funding. If you're approved, the funds could be in your bank account in as little as 24 hours. This varies by lender.
• Con: Higher interest rates. While most unsecured personal loans have fixed annual percentage rates (APRs), they are typically higher than other home improvement loans. Remember, the lender is taking on most of the risk in this transaction, so a higher APR helps ensure that they can recoup at least some of their funds.
• Pro: Taking advantage of leftover funds. Lenders often have preset increments in which they offer personal loans and will decide how much to approve based on your credit score and financial history. If you're approved for an amount that's more than what your home improvement project will cost, you could use the excess to pay down debt that may have higher interest than the loan itself.
• Con: Taking on debt. Can you afford a monthly loan payment in the first place? Check your budget before you apply. What you don't want to happen is for this additional expense to become unmanageable. Even if your house is safe from foreclosure, your credit history could be negatively affected if you fail to repay the loan.

Other types of home improvement loans

If a personal loan doesn't sound like the best home improvement loan for your financial situation, there are a few other types of home improvement financing that may also be available to you.

Each of these three uses home equity — the market value of the home minus the amount still owed on the mortgage — to determine the terms of the loan.

1. Home equity loan, also known as a second mortgage

This is a secured type of loan, and your home is the asset that you're putting up as collateral. You can apply to borrow the exact amount of the cost of your home improvement project, up to a determined percentage of the amount of equity that you've put into the house.

Different lenders will have different terms and conditions and some states limit the amount equity you can borrow. In Texas, for example, you may only be able to borrow up to 80% of the equity in your home, including your primary mortgage and the home equity loan. So, if your home is worth $250,000, the total borrowed amount including your primary mortgage and the home equity loan could not exceed $200,000.

If approved, you'll receive the loan amount as a lump sum and then start paying it back with interest (typically a fixed APR). Because you put up collateral, your interest rate will be lower than if you took out an unsecured personal loan. But if you default on the loan, the lender could attempt to take your home.

2. Home equity line of credit, or HELOC

This is also a secured type of loan, and your home is the collateral. The main difference is that this loan is handled similarly to a credit card, in that there is a set limit. You can access the line of credit as you need it, and you'll only start paying it back as you use it.

Another difference is that the interest rate on a HELOC is variable, so when you pay it back, the amount can fluctuate based on market conditions. Again, if you can't manage these payments and default on the loan, the lender could take your home.

3. Cash-out refinancing

This is where you cash out a percentage of the equity you have paid into your home and use that money to pay for your home improvement project. In other words, you're taking on a new mortgage that's more than what you owe and then cashing out the difference. Pay close attention to the timing of this option — aim for when interest rates are lower than your current mortgage if you can. That's because a cash-out refinance requires the entire current mortgage to be refinanced, so the overall financial impact could be significant if rates are higher than the current mortgage rate. If this is the case, you will likely want to consider other options.

Depending on the lender, each of these options may have associated fees and closing costs that you'll need to account for when making your decision. Crunch the numbers and see which type of home improvement financing will help you get the funds you need to complete your project without derailing your other financial goals.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.