Whether you’ve been in your home for decades or just a few months, sometimes it needs a little extra love. But the money for home improvements — from little fixes to massive overhauls — isn’t always available in your bank account. Luckily, you have a few options to finance home renovations if your cash flow is running low.
The best ways to pay for home improvements include:
- Home remodel or home repair loan.
- Home equity line of credit (HELOC).
- Home equity loan.
- Cash-out refinance.
- Credit cards.
- Government loans.
Should I finance my home renovation?
How you pay for your home renovation depends on your financial situation and the size of the project. Saving up for a specific project and using those funds is the ideal way to pay for a home upgrade. However, that isn’t always possible. Emergency expenses and larger renovations can make financing necessary.
To determine whether home improvement financing makes sense, you’ll need to consider your monthly budget and your project’s size and return on investment. Are you able to make another monthly payment? Will the project you’re planning increase the value of your home? How long will this renovation take?
If you’re in good financial health and the project will boost your home’s value, the extra cost of financing could be worth it.
6 best ways to finance home improvements
If you’ve decided that financing is right for your home renovation, you have a number of options.
1. Home remodel or home repair loan
Home improvement loans are unsecured personal loans offered by banks, credit unions and a number of online lenders. Because the loans are unsecured, you don’t need to use your house as collateral to qualify. Your interest rate and qualification are based largely on your credit score. Funding comes quickly; once you agree to the terms, many lenders deposit money straight into your account in as little as a day.
Home repair loans and remodel loans typically have shorter repayment timelines, lower loan amounts and fewer fees than home equity loans or HELOCs. They’re typically best for small or midsize projects in your home, such as a bathroom makeover or window replacement.
However, keep in mind that because they’re unsecured, home renovation loans typically have higher rates than home equity loans and HELOCs, especially if you have fair or poor credit. Some lenders also charge fees for application processing, late payments and even prepayments on a remodel loan. Before applying, compare the best home improvement loan lenders that offer low interest rates, competitive fees, friendly repayment terms and quick payouts.
2. Home equity line of credit (HELOC)
Because a HELOC is a secured loan — backed by your home — you can qualify for lower interest rates than you would for an unsecured personal loan. A HELOC is also revolving credit, which means you can take what you need when you need it (up to your borrowing limit).
For ongoing or lengthy renovation projects, a HELOC may be a good home improvement financing option. It’s also a great home repair loan option since it allows for quick access to funds.
However, because you’ll have to put your home up as collateral, it could be foreclosed if you don’t make payments on time. Most HELOCs also have variable interest rates, which means your payments can increase depending on market conditions.
HELOCs do come with one major prerequisite: To borrow against your house, you must have sufficient home equity. Before considering a HELOC, make sure you have at least 15 percent to 20 percent equity in your home.
3. Home equity loan
Instead of a HELOC, you could apply for a home equity loan, which is sometimes referred to as a second mortgage. Like a home improvement loan, this is a loan paid out in a lump sum that you can repay over a number of years in regular fixed monthly payments.
With home equity loans, you don’t have to worry about market fluctuations; once you lock in your fixed interest rate, you pay the same monthly payment over the life of your loan. The downside to this is that you have less payment flexibility than you would with a HELOC.
If you know exactly how much your project will cost, a home equity loan could be the perfect remodel loan option since you’ll receive all funds up front. However, missing payments can significantly hurt you. Since this type of loan also uses your home as collateral, your home could be foreclosed if you fall too far behind on payments.
4. Cash-out refinance
A cash-out refinance replaces your current mortgage with a new, larger loan and gives you a new interest rate. Since you get to pocket the difference between your old mortgage and the new loan, you could use the extra dollars from a cash-out refinance to make home improvements.
If you’re thinking about refinancing, consider the drawbacks carefully. You’ll need to pay for an appraisal, origination fees, taxes and other closing-related costs. And unless you refinance your mortgage for a shorter term, you’ll be extending the life of your loan, meaning it will take you longer to pay it off. In general, refinancing is only a good idea if you can secure a lower interest rate than what you pay now.
5. Credit cards
If you’re making minor updates to your home, such as upgrading a bathroom vanity or installing a new closet system, using your credit card might be one of the best home improvement financing options. What’s the advantage? Some cards are interest-free for the first few months. If you’re using a 0 percent introductory APR card, you could pay for minor home improvements without ever paying interest. Many cards also come with great rewards, so the more you spend on a renovation, the more cash back you could earn if your credit card offers cash back perks.
There are some risks associated with making large home improvement purchases on a credit card. If you can’t pay your balance back before the introductory offer expires, you could face exceptionally high interest rates — much higher than other home remodel loan options. And if you use your regular card instead of an introductory offer card, you’ll need to pay the entire amount back by your next billing cycle — usually a month — if you want to avoid interest. With variable interest rates, that amount you pay in interest could also rise as market conditions shift.
6. Government loans
If you qualify for a government loan, you could save on the costs of interest and insurance.
One type of government loan is a HUD Title I Property Improvement Loan. It lets you borrow up to $25,000 without having any equity in your home. This is a good home repair loan option if you’ve recently purchased your home and need to make upgrades. However, the money must go toward renovations that improve the livability of the home, and some upgrades may not qualify.
Veterans Affairs also offers cash-out refinance loans, which guarantee 100 percent of the value of your home. In the event that you can’t make payments, the VA loan guarantee is the “insurance” it provides to your lender.