Are Home Improvement Loans Worth It?

Architecture, How To..., Interior Design

Hedwig Village process pictures of the loggia done by Laura U


Property values across the country are soaring to new heights and interest rates are hovering around record lows. As such, 2021 could be the right time to take out a home improvement loan. When property values increase, the amount of equity in one’s home versus the amount of money they owe on a mortgage increases as well. This means that the homeowner has more equity to leverage when borrowing against their home for renovations. Homeowners with a fair amount of equity in their homes have an easier time securing loans during this period. Similarly, when interest rates are low, the total eventually owed on a home improvement loan is less. With interest rates low, first time homebuyers have an easier time securing home improvement loans. However, home improvement loans are not always worth the time, energy or money. For example, return on investment varies greatly between different types of renovations and materials. Follow below to learn which renovations deliver the highest returns and if home improvement loans are worth it.


Understanding the Post-Pandemic Surge in Home Improvements


Quote on understanding the post-pandemic surge in home improvements


Despite the fact that homes across the country are easily selling “as is,” the number of renovations have skyrocketed. Quoting economist Max Anderson during broadcast for NPR, Frank Morris elaborates. Morris notes that “‘in terms of measured history in the United States, this is the highest levels of home improvement spending we’ve ever seen.’” In an article for Business Insider, Hillary Hoffower notes that “home improvement and repair spending grew by nearly 3% to $420 billion in 2020.”

This shocking increase in home improvement spending likely comes from four sources. These sources include record low interest rates, high materials costs, rising home values and the need to feel more comfortable at home. Writing for Fast Company, Nate Berg offers a bit of perspective. According to Berg, “lockdowns…and general lack of anything to do…led many people to look at their homes in a new harsh light.”




Quote about an increase in large kitchen remodels in the past year

Most homeowners are focusing on kitchens and outdoor spaces when conducting renovations. Quoted by Berg, economist Marine Sargsyan elaborates. She notes that “‘the median investment on major remodels of large kitchens increased 14% in 2020 compared to recent years.” NPR reporter Frank Morris identifies outdoor renovations as the “category of home improvement surging the most.” He notes that “deck construction is up 275%…hiring landscapers is at 238% [and] fence construction installation is at 144%.”



Demographics of homeowners most likely to take out home improvement loans are Baby Boomers and Millennials. Writing for Business Insider, Hillary Hoffower explains that many Millennials who purchased their first homes during the pandemic settled for fixer-uppers. During an incredibly hot sellers market that dragged on for months, homes in need of serious renovations were likely all younger buyers could afford.

Millennials who recently purchased their first homes are most likely to have taken out FHA 203(k) rehab loans. FHA 203(k) rehab loans bundle home improvement loans with mortgage loans to limit expenses for first-time buyers. Baby Boomers represent the second group of homeowners expected to undertake renovations in 2021. With property values rising across the country, Boomers who have owned their homes for years are now seeing an increase in equity. Because of this, Boomer homeowners will likely continue to take out home equity loans to finance home improvements.


Home Improvements with the Highest ROI in 2021


Before and after of a kitchen remodel done by Laura U

Of course, the value of home improvements is determined in two ways. First, one must consider how much a certain type of remodel will improve the homeowner’s enjoyment of their house. Second, one might consider how much money they can recoup for a renovation upon selling their house in the future. For some homeowners, financial return on investment will not matter as much as immediate functionality. However, many do consider the eventual payback, which can change from year to year depending on buyer preferences. Below, we outline which home improvements have the best return on investment in 2021.




Quote discussing the importance of exterior renovations and curb appeal


Exterior renovations like garage door replacements, replacing siding, adding veneers and improving landscaping all offer favorable returns on investment. In the article “10 Home Renovations With the Best ROI: 2021 Guide” for Million Acres, Maurie Bauckman explains. Bauckman writes that “the right exterior could really make a difference in sale price” because “curb appeal is huge.” According to Bauckman, upgrading the exterior of your home with a manufactured stone veneer is a great investment. Unlike natural stone, applying manufactured stone veneer to the side of your home only costs about $9,357 on average.

Homeowners who choose to add manufactured stone veneer to the exterior can expect a return of $8,493.00. This means they “stand to recoup 95.6% of [their] outlay.” Similarly, replacing a home’s garage door adds value. Maurie Bauckman writes that “the average cost to replace a set of garage doors is $3,695.” Of this, homeowners can recoup $3,491, [resulting in] a cost recovery of 94.5%.” In short, anything that improves a prospective buyer’s first impression of a home will likely add to the eventual sale price.




Quote talking about adding an ADU to a property


Depending on your area, adding an accessory dwelling unit could increase its value significantly while also improving its functionality. ADUs can provide homeowners with passive income opportunities, higher property values and/or extra living space for family members.

However, the ROI of an ADU depends greatly on the rental market, cost of materials, cost of labor and property values in your area. That said, accessory dwelling units often contribute between 25% and 50% to a property’s overall value. Homeowners should keep in mind, however, that adding a granny flat to your property will likely increase property taxes as they increase property value.




Quote talking about how landscaping upgrades can result in a large return


Just as the number of outdoor renovations has exploded in 2021, so has the value of backyard improvements. Expanding a deck, screening a porch or sprucing up the landscaping can all contribute to the value of a home and a great ROI. For example, Michele Lerner writes in an article for The Washington Post that deck additions offer a 75.6% ROI. Outdoor kitchens and screened porches could also add value, according to Hadley Mendelsohn in a recent article for House Beautiful. Quoting renovation consultant Meredith Still, Mendelsohn writes that screened porches “‘offer a return on your investment if you ever intend on selling your home.’”

However, just like ADUs, screened porches “can absolutely increase your property taxes.” According to Mendelsohn, this “is the biggest long-lasting expense to consider before calling your contractor.” Lastly, landscaping could greatly improve the eventual sale price — and enjoyment — of a home. In her article “How Much Does It Really Cost to Renovate Your Outdoor Space?” for Better Homes & Gardens, Mia Taylor explains. Designer Andra DelMonico tells Taylor that “‘landscaping upgrades can net an 83% return, making it a smart investment.’”




Quote about how remodeling a kitchen can help sell your home


Kitchen remodels are popular not only for their ROI but also for the functionality they add to a home. However, major kitchen renovations involving tear-downs, chef-grade appliances and marble countertops might not be the best investment. In his article “Is Your Renovation Actually Worth It?” for House Beautiful, Brett Martin elaborates. Martin writes that typically, “an average kitchen remodel will pay off more than a high-end renovation.” This is because it appeals to the largest number of buyers.

Referencing recent polling, Martin notes that “a major kitchen remodel…[offers a] 58.6 percent” ROI while “an upscale kitchen remodel costs [offers] a 53.9 percent ROI.” Oftentimes, kitchen remodels are more likely to pay off if the current kitchen is far more outdated than the rest of the house. Because buyers look for consistency of design, style and period, ensuring the entire home is cohesive adds value.


Types of Home Improvement Loans


Home improvement loans are loans backed by a bank, the federal government, a state government or a private lender. Home improvement loans backed by the federal government include the HUD rehabilitation and repair home loan. They also include the HUD property improvement loan and a series of rural home improvement loans. These are explained in further detail on the US Department of Housing and Urban Development website. Other common types of home improvement loans include home equity line of credit, home equity loans, cash out refinancing and unsecured or personal loans.

Homeowners apply for home improvement loans during various stages of ownership. They typically do so when first purchasing a home, before selling or after the home has sustained damage. Different types of homeowners are eligible for and best served by different types of home improvement loans. As such, the right home improvement loan for one homeowner might not be worth it to another homeowner. Learn about four common types of home improvement loans — and which might be right for you — below.




Quote talking about cash out refinancing and it's benefits


First on our list of home improvement loans is cash out refinancing. In his article “Cash-out mortgage refinancing: How it works and when it’s the right option” for Bankrate, Zach Wichter explains cash out refinancing. Wichter writes that cash out refinancing “replaces your current home loan with a bigger mortgage.” This allows the homeowner “to take advantage of the equity you’ve built up in your home.” The difference between your previous mortgage and the mortgage after refinancing is returned to you in cash for home improvements or other needs. Unless your loan is backed by the FHA, you will not be able to borrow more than 80% of your equity. According to Wichter, “most lenders require you to maintain at least 20 percent equity in your home in a cash-out refinance.”

Is Cash Out Refinancing Worth It?

Unlike some other types of home improvement loans, cash out refinancing usually requires an appraisal, which some homeowners find invasive. The terms of your mortgage loan could also change, which could be a positive or negative result of this process. However, cash out refinancing does offer several perks to homeowners. If you have a lot of equity or if your home’s value has recently increased significantly, cash out refinancing might be best.




Quote talking about home equity loans and it's benefits


Because home equity loans and home equity lines of credit sound very similar, they are often confused by homeowners. In their article “Need cash? Here are two options for homeowners” for Investopedia, Daniel Kurt and Lea D. Uradu properly define home equity loans. Kurt writes that both types of home improvement loans “use the equity in your home…as collateral.” Like cash out refinancing, home equity loans and HELOCs both offer “extremely competitive interest rates” when compared with personal loans or credit cards. Home equity loans differ from HELOCs in that they “come as a lump sum of cash.”

Is A Home Equity Loan Worth It?

Most home equity loans are offered at fixed interest rates, which is a positive for homeowners who want a reliable monthly payment. However, home equity loans are rarely issued for small home improvement projects. According to Kurt in his article for Investopedia, most lenders will not issue a home equity loan “for less than $35,000.”

When securing a home equity loan, homeowners must also pay “many of the same closing costs associated with a first mortgage.” Such costs include “loan-processing fees, origination fees” and more. These fees are often paid upfront. There is also a downside to leaning on the equity you have in your home, writes Kurt. Because lenders “place a second lien on your home,” you could lose the rights to your home “if you fail to make payments.”




Quote talking about home equity line of credit and how it can help


A home equity line of credit is similar to a home equity loan as it draws on the equity you have in your home. However, it differs in how the homeowner accesses this money and how he or she pays it back. According to Bank of America, HELOCs are lines of credit based on your equity. They provide “a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans.” Interest on HELOC home improvement loans is often tax-deductible. Most HELOCs have variable interest rates, but some are eligible for fixed rates.

Unlike home equity loans, HELOCs allow the homeowner to continue borrowing against their line of credit as they need more cash. BOA notes that with a HELOC, “you can borrow as little or as much as you need.” You can do so “throughout your draw period (typically 10 years) up to the credit limit you establish at closing.” HELOCs typically offer homeowners a repayment period of twenty years, similar to that of a mortgage.

Is A HELOC Worth It?

HELOCs are most valuable to homeowners when interest rates are low because they operate on variable interest rates. According to Natalie Campisi in her article “Smart ways to use your home equity for remodeling” for Bankrate, HELOCs might be right for now. As of Summer 2021, interest rates were very low. Around this time, “the average home equity loan rate was 5.36 percent APR, and the average HELOC rate was 4.11 percent APR.” As interest rates increase, homeowners should consider a fixed rate loan instead.


#4 FHA 203(k) REHAB LOAN


Quote about FHA 203(k) rehab loans and what they do

Earlier in this post, we noted that first time home buyers often apply for home improvement loans when they purchase the property. This is most common with fixer-uppers that require immediate renovations, often related to livability rather than aesthetic appearance. In these cases, homeowners usually apply for FHA 203(k) Rehab Loans. In an article for The Mortgage Reports, Erik J Martin explains FHA 203(k) rehab loans. He writes that they “bundle your mortgage and home improvement costs into one loan.” Unlike other types of home improvement loans, “you don’t have to apply for two separate loans or pay closing costs twice.”

Is an FHA 203(k) Rehab Loan Worth It?

Martin notes that these types of loans are best “when you’re buying a fixer-upper and know you’ll need financing for home improvement projects soon.” Because they are backed by the federal government, FHA 203(k) Rehab Loans require lower down payments — as little as 3.5% — and lower base credit scores than other types. However, there are a few negatives to applying for an FHA 203(k) rehab loan. First, they are only available to homeowners with older houses in need of significant repairs. Second, they require the homeowner to pay mortgage insurance each month.




Quote about how unsecured loans charge a higher interest rate

Last on our list of home improvement loans is the unsecured or personal loan. Some lists of home improvement loans will also include credit cards. However, because credit cards are not designed for home improvements, renovations or remodels, we have not included them as an option. Unsecured home improvement loans are often chosen by homeowners with high credit scores but little equity in their homes. Personal loans rely on the homeowner’s credit score, debt to asset ratio and other eligibility factors other than home equity. Interest rates could be either fixed or variable on these loans, which are typically paid out in a lump sum.

Are Personal Loans Worth It?

CPA Erica Gellerman notes in “Home improvement loans: Which type is best for you?” for Credit Karma that personal loans are riskier for lenders. Lenders are unable to foreclose on your property if you fail to make payments. As such, “lenders usually charge a higher interest rate on unsecured loans.” However, if the homeowner’s credit is excellent, he or she may still be able to find a loan with a reasonable rate. Unsecured loans are best for those with high credit scores and little equity.


Final Thoughts on Home Improvement Loans


Hedwig Village process pictures of the loggia done by Laura U


As outlined above, there are several types of home improvement loans worth considering. These include HELOCs, home equity loans, unsecured personal loans, FHA 203(k) rehab loans and cash out refinancing. Homeowners with high credit scores, but little equity would likely be served by a personal loan. Those with lots of equity might consider cash out refinancing. Homeowners in a market with low interest rates might consider a HELOC. Owners who prefer a reliable monthly payment might want a home equity loan.

There are also several types of renovations worth investing in — from kitchen updates to backyard landscaping. At LUDC, founder Laura Umansky and her team work with homeowners to create livable, luxurious spaces with great ROI. As a full service design firm, the Laura U Design Collective is well-qualified to handle any type of remodel, no matter how complex.

Are you ready to remodel your home? Fill out our client inquiry form!