Home improvement financing options

Not every homeowner has $5,000 to $20,000 sitting in a savings account waiting for a home improvement project. That is completely normal. Most major projects are financed in some way.

Here are the most common options, with honest trade-offs for each.

Quick comparison

Personal loans

A personal loan is an unsecured loan from a bank, credit union, or online lender. You borrow a fixed amount, pay it back in fixed monthly installments over a set term, and your home is not used as collateral.

Best for: Projects under $50,000 when you do not want to use your home as collateral or do not have enough equity.

Pros:

• Fast funding (often within a few business days)
• No home equity required
• Fixed payments you can budget around
• Your home is not at risk if you struggle to pay

Cons:

• Higher rates than secured loans, especially with lower credit scores
• Lower maximum amounts than home equity products
• Rates depend heavily on credit score (below 680, expect rates above 15%)
• Origination fees of 1% to 8% are common with some lenders

When it makes sense: You need $5,000 to $30,000, want predictable payments, and either do not have enough home equity or do not want to put your home at risk. Shop rates from your bank, credit union, and at least one online lender before committing.

Home equity loans

A home equity loan lets you borrow against the equity you have built in your home. You receive a lump sum and repay it in fixed monthly installments. Your home is the collateral.

Best for: Large projects ($20,000+) when you have significant equity and want a low fixed rate.

Pros:

• Lower rates than personal loans (because your home secures the loan)
• Higher borrowing limits for large projects
• Fixed rate and fixed payment for the life of the loan
• Interest may be tax-deductible if used for home improvements (consult a tax professional)

Cons:

• Your home is collateral. If you cannot make payments, you risk foreclosure.
• Slow to fund (appraisal, underwriting, closing can take weeks)
• Closing costs of 2% to 5% of the loan amount
• Requires sufficient equity (most lenders require at least 15% to 20% equity remaining after the loan)

When it makes sense: You have a project costing $20,000 or more, you have significant equity in your home, and you want the lowest possible fixed rate. The slow funding timeline means you need to plan ahead.

HELOCs (home equity line of credit)

A HELOC works like a credit card backed by your home equity. You are approved for a maximum amount and can draw from it as needed. You only pay interest on what you borrow.

Best for: Phased projects, ongoing renovations, or when you are not sure of the final cost.

Pros:

• Flexible borrowing (take what you need, when you need it)
• Only pay interest on the amount you have drawn
• Reusable credit line during the draw period
• Interest may be tax-deductible for home improvements
• Lower rates than personal loans or credit cards

Cons:

• Variable rates can increase significantly over time
• Your home is collateral
• Easy to overborrow because unused credit is always available
• Payments can jump when the draw period ends and repayment begins
• Closing costs and annual fees may apply

When it makes sense: You have a phased project, are doing multiple improvements over time, or do not know the exact final cost. A HELOC gives you access to funds without borrowing more than you need. Just be disciplined about not using it as a general spending tool.

Credit cards

For smaller projects under $5,000, a credit card with a 0% introductory APR period can be a smart option, but only if you can pay it off before the promotional period ends.

Best for: Small projects under $5,000 when you can pay off the balance within the promotional period (typically 12 to 21 months).

Pros:

• Instant access to funds
• 0% APR promotional periods save money on interest if you pay in full
• Rewards points or cash back on spending
• No application process beyond the card itself

Cons:

• Standard rates of 20% to 29% APR after the promotional period
• Low credit limits for large projects
• Carrying a high balance damages your credit score
• Minimum payments barely cover interest after the promo period ends
• Some contractors charge a 2% to 3% processing fee for card payments

When it makes sense: Your project is under $5,000, you have a card with a 0% APR period of 12 months or longer, and you are confident you can pay the full balance before the promotional rate expires. If there is any chance you will carry a balance past the promo period, a personal loan is almost always a better option.

Contractor financing

Some contractors offer their own financing programs, often through third-party lending partners. These are convenient but not always the best deal.

Best for: When you want a single point of contact and the terms are genuinely competitive after comparison shopping.

Pros:

• Convenient (apply during the quoting process)
• Sometimes offered with promotional rates (0% for 12 months, etc.)
• No separate lender relationship to manage
• Quick approval in many cases

Cons:

• Limited comparison shopping (you are only seeing one option)
• Rates may be higher than what you could find independently
• Dealer fees may be built into the project cost, making the “0% financing” less of a deal than it appears
• Deferred interest promotions can be a trap (if you do not pay in full during the promo period, you owe interest on the full original balance from day one)
• Fewer consumer protections than regulated banking products

When it makes sense: Only after you have compared the contractor’s offer with at least one independent option (bank, credit union, or online lender). If the contractor’s terms are genuinely competitive, the convenience factor is worth something. If they are not, use your own financing.

Warning about deferred interest: Some contractor financing offers use “deferred interest” rather than “0% APR.” These look similar but are very different. With deferred interest, if you do not pay the full balance by the end of the promotional period, you owe all the interest that accrued from day one. Read the fine print carefully.

Government programs and incentives

FHA Title I loans

The FHA Title I program allows homeowners to borrow up to $25,000 for home improvements without using their home as collateral (for loans under $7,500). These loans are partially government-backed, which means lenders can offer better terms to borrowers who might not qualify for conventional products.

Best for: Homeowners who need financing but have limited equity or lower credit scores.

PACE loans (property assessed clean energy)

PACE loans finance energy efficiency improvements and are repaid through your property tax bill. They are available in some states and municipalities for qualifying projects like insulation upgrades.

Pros: Long terms, no upfront credit check in most programs, transfers with the property if you sell.

Cons: Creates a lien on your property that is senior to your mortgage (this can create problems if you refinance or sell). Some programs have been criticized for high fees and aggressive sales tactics. Check your state’s consumer protection guidelines before enrolling.

Best for: Insulation and energy efficiency projects in participating areas, especially if other financing options are limited.

Federal tax credits (Inflation Reduction Act)

The Inflation Reduction Act offers significant tax credits for qualifying energy efficiency improvements:

• 30% tax credit on qualifying insulation and air sealing projects (up to $1,200/year)
• Covers materials and installation labor for insulation, doors, windows, and other energy efficiency upgrades
• Available through at least 2032

This is not financing, but it reduces the net cost of your project. A $5,000 insulation project with the full credit effectively costs $3,500. Factor this into your budgeting.

Important: This is a tax credit, not a rebate. You claim it when you file your taxes. You must have enough tax liability to use the credit, and it does not roll over to future years.

Utility rebates

Many local utilities offer rebates for energy efficiency improvements, particularly insulation. These vary by utility company but typically range from $200 to $1,500 for insulation upgrades.

Check with your local utility company or search the DSIRE database (Database of State Incentives for Renewables and Efficiency) for programs in your area. Some rebates can be combined with federal tax credits for even greater savings.

State and local programs

Some states offer additional incentives:

• Low-interest loan programs for energy efficiency
• Weatherization assistance programs for income-qualifying homeowners
• State tax credits or deductions for qualifying improvements

Check with your state’s energy office for current programs. These change frequently, so verify availability before factoring them into your budget.

When to pay cash vs finance

If you have the cash, should you use it? It depends on your situation.

Pay cash when:

• You have savings set aside specifically for home improvements
• Paying will not deplete your emergency fund (keep at least 3 to 6 months of expenses in reserve)
• The project is relatively small (under $5,000)
• Current interest rates are high
• You want to avoid debt entirely

Finance when:

• The project is urgent (foundation repair, failed insulation in winter) and you do not have savings available
• You can get a rate below 8% to 10% and prefer to keep cash in reserve
• The project qualifies for tax credits that offset the cost of borrowing
• You want to preserve liquidity for other investments or emergencies
• The project will generate returns (energy savings from insulation often exceed the cost of financing)

The math on insulation financing

Here is a common scenario: A homeowner finances a $4,000 attic insulation project with a personal loan at 8% APR for 5 years. Monthly payment is about $81. But the insulation saves $50 to $100 per month on energy bills and qualifies for a $1,200 tax credit. The project pays for itself within 3 to 4 years, even with financing costs.

How to choose the right option

The right choice depends on your credit score, available equity, project size, and how quickly you need funding. Start by checking rates from your bank or credit union before exploring other options. Even 15 minutes of comparison shopping can save you hundreds or thousands over the life of the loan.

First step: know your project cost

Before you apply for financing, get quotes from contractors so you know how much you actually need. Borrowing the right amount saves money on interest. Too much means wasted interest payments. Too little means a second round of financing.

Get free quotes for your project