Zero-Interest Home Improvement Loans: What to Know

A zero-interest home improvement loan is an effective way to finance a large home improvement project such as a renovation or addition. These types of projects can often be very expensive, and few homeowners may be able to finance them with cash or credit card payments alone.

When considering how to finance an expensive home improvement project without sufficient cash on hand to cover all of the costs yourself, you have several options, including a home equity loan line of credit or an FHA 203(k) loan.

While most loans involve some degree of interest—that is typically the way that the lender earns money on the loan—in some cases state or county governments, non-profit organizations, and others are willing to support homeowners by providing loans with no interest at all. In exchange, owners must meet certain qualifications and must satisfy all terms of the loan.

What Are Zero-Interest Home Improvement Loans?

Non-profits and governments that offer zero-interest home improvement loans do so to help individuals in need and without an attempt to earn money when the homeowner repays a loan with interest. The names of these loans may differ depending on your location, but they often go under the name of Home Improvement Program ("HIP"), home repair/improvement assistance, or something similar.

While traditional loans like mortgages follow many of the same guidelines and structures regardless of which lender you choose, zero-interest home improvement loans can vary widely depending on the organization offering the loan. Here are some examples:

• The Redevelopment Authority of Allegheny County in Pennsylvania, for instance, sponsors the Allegheny Home Improvement Loan Program.
• King County, Washington, offers grants and loans through the Department of Community and Human Services.
• In Hennepin County, Minnesota, residents can apply for up to $30,000 in no-interest home repair loans.
• The non-governmental organization Habitat for Humanity offers a Home Preservation program that provides many of the services one might otherwise pay for with a zero-interest home improvement loan.

How Do Zero-Interest Home Improvement Loans Work?

Under many of these programs, low-income homeowners take out a loan for home improvement purposes, and counties agree to subsidize the loan. Terms and eligibility vary depending on the government agency or other organization administering the program.

Eligibility Requirements

These loans are often only available to certain qualifying homeowners. Depending on the loan, you may be required to fall into one or more of these categories:

• Your annual gross income must be below a certain limit. 
• Your house must be valued below a certain limit. 
• You must let the program administrator monitor the project.
• Certain taxes must be paid in full.
• You cannot use the money to pay off other loans, even if those loans are house-related.
• You cannot use the loan money to pay for projects begun before the time when the HIP loan is approved.
• You must complete the project within a certain time period, such as one year.

Other loans are specifically set up for seniors, for residents of certain areas, and for individuals with poor credit who may be ineligible for traditional loans, for example.

To access a loan, you'll first need to identify organizations offering them in your area. You'll then have to determine whether you qualify based on the terms of the specific loans. If you do, you'll be able to apply and, if successful, receive support for your desired home improvement project.

A typical borrowing cap is around $18,000 to $35,000. It is rare to find HIP loans in the six figures. Some areas offer matching funds up to a specified limit.

Tips for Maximizing the Benefits of Zero-Interest Home Improvement Loans

Those who qualify for a zero-interest loan for home improvements will likely find it's worth the red tape involved in applying because it lets them fund a costly project at considerable savings. In one common scenario, a county government might subsidize 350 basis points of your loan's interest rate. Some counties help arrange 0% loans for certain projects, such as boosting a home's energy efficiency.

Let's run the numbers for a partially subsidized loan. This example of a five-year $20,000 loan compares your costs with and without an interest rate reduction of 350 basis points.

• Without the subsidy: With a 4.5% interest rate, you will pay about $372 per month. Total interest is $2,371.
• With the subsidy: With the interest rate at 1%, you will pay about $341 per month, for a savings of about $30 per month. Total interest is $512.

By taking out the HIP-style loan in this case, you would save $1,859 in interest. If the loan is fully subsidized or interest-free, the savings could potentially be even higher.

Budgeting, Planning, and Prioritizing

Just as you'll need to be organized when applying for a zero-interest home improvement loan, you'll also need to carefully plan out your projects in order to achieve maximum savings. One of the first steps to doing this is understanding the costs of any projects you're considering. Make a budget of projected expenses based on quotes from contractors or other professionals who might complete the project, and be sure to factor in how much these improvements might reduce preexisting costs (such as electricity) or add to the value of the home.

In many cases, a home improvement loan will require you to complete the affiliated project within a certain timeframe. In this case, having a plan that you know you'll be able to execute within the limits of the loan terms is essential. It may be necessary to select one project over another you have in mind because of the timeline.

Finally, prioritizing one project out of a longer list can help you to maximize savings. Say that you're eligible for a loan that covers up to $20,000 of the cost of one project. If you have one project with an estimated cost of $12,000 and another with an estimated cost of $24,000, you may be best off going for the more expensive project, if you're able to make up the difference on your own. Even dipping into your own funds, you'll still be better able to capitalize on the loan offer. Of course, this depends on the terms of your specific loan.

Why Counties and Nonprofits Offer These Loans

Counties and some nonprofits have a mandate to serve residents, especially low-income families. On a larger scale, counties are interested in maintaining the value of housing stock. When housing stock declines, the overall quality of life declines. Finally, providing these loans drives the economic machine by helping create projects that create jobs.

Things You Cannot Use the Money for

Typically you are barred from financing cosmetic projects or luxury projects such as swimming pools, satellite dishes, hot tubs, landscaping, and so on. Some providers put limits on the types of appliances you can purchase with the loan, allowing only permanent ones (a furnace vs. a refrigerator, for example). 

Loans are intended to rehabilitate structures, modernize any outdated issues, or correct violations, not purchase a new property or finance construction. Note, though, that some counties do have similar programs to help homeowners purchase properties.

Where to Find Programs

There's no guarantee your area government will have this program. You might find one under social services, housing, or community development departments on your local county's website. If searching within the county, use the words "housing improvement," "HIP," or "repair assistance." In a web browser, you might try searching for "low-cost home improvement" + "loan" + your county's name.

In addition, the Section 504 Home Repair program, administered by the U.S. Department of Agriculture, provides up to $40,000 in repair loans and $10,000 in grants (if you are 62 years or older) on a state-by-state basis.

Alternatives to Zero-Interest Home Improvement Loans

If you're looking for support for an upcoming home improvement project but you don't meet the qualifications for a zero-interest loan, or if you simply prefer a different set of terms, you might consider one of the following alternatives.

• Mortgage refinancing: Mortgage rates were high in 2023, at least compared with recent years. If you bought your home at a time when rates were high and they've since come down, you may be able to save money on your mortgage payments by refinancing. This could help to free up extra cash to put toward an improvement project.
• Personal loans: Personal loans offer the advantage of not having to put your home up for collateral or use your equity to finance the loan. However, these loans typically require that you have very good to excellent credit.
• Home equity loan: Home equity loans provide you with a lump sum that you will pay back over a fixed term, usually of several years. These are occasionally referred to as "second mortgages," and typically are limited to a percentage of the equity you have in the home.
• Home equity line of credit: A home equity line of credit (HELOC) allows you to borrow against the value of your home as well. Instead of receiving a lump sum, though, you'll be eligible for a line of credit, typically set at a percentage of the value of your home, less the amount of your loan. HELOCs come with a fixed draw period during which you can spend the money in the credit line, followed by a repayment period.

The Bottom Line

Programs that offer home improvement loans with zero interest can be found in some counties. They typically have eligibility requirements that include maximum incomes based on household sizes. Typically, there are also limitations on what the funds can be used for. The best ways to find these programs is to check with your local county government.