Home improvement loans are not usually designed exclusively for making home improvements. They are typically categorized as a home equity loan, second mortgage, home equity line of credit, cash out refinance, or an unsecured personal loan. These loans provide cash, which can be used for home improvement.
Most of these "home improvement loans" borrow against the equity in your home, as a first or second mortgage lien, to provide money that can be used to remodel or make improvements to your owner-occupied home. These home equity based loans are subject to standard lending guidelines, and generally do not include the value of intended home improvements in the appraisal.
There are home improvement loan programs with no equity, which are unsecured by a lien on your house. These personal unsecured loans usually offer limited amounts between $25,000 to $35,000. The loan term is shorter than a home equity type of loan, and there is no interest tax deduction.
Flexible Use of Funds
Taking cash out with one of these loan programs typically does not restrict the use of funds for remodeling or home improvement only. You normally have the option of using the loan for just about any purpose, even though it's labeled as a home improvement loan. Lenders may just use the phrase as a marketing term.
Rates and Payments
Loans that access your home equity can be a fixed rate installment type of loan, with fixed monthly payments, or a variable rate line of credit, with payments that adjust according to the loan balance. Fixed rate home improvement loans give you the entire loan in one lump-sum amount. Variable rate credit lines can be used as needed, and even re-used after the loan balance is payed down.