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How to pay for home improvements

Man installs cabinets
Viktor Pravdica/Adobe Stock
Man installs cabinets
Viktor Pravdica/Adobe Stock
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 Whether you are preparing to sell your home or you just want a refresh for a new season, a home project is a big undertaking. One of the biggest questions you may ask as you plan any home renovation is how to pay for it.

Thinking ahead about how to finance your home project is essential for avoid added costs and future financial problems. You could pick from several choices to pay for your home project depending on your financial status and goals. Consider all your options to make the best decision for your financial future.

Deciding if you should finance your 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, consider the following:

  • What is your monthly budget and are you able to make another payment?
  • How big is the project?
  • Will the project increase the value of your home?
  • How long will the 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. However, you should be aware of roughly how much a planned project will cost before deciding to take the plunge.

The average cost of a home renovation project in the U.S. is $15,000. This average applies to any given project, but you can get a better idea of the costs based on

Average cost of common home improvement projects:

  • Whole house renovation: $15,000 to $200,000
  • Adding a room: $135,000 to $282,000
  • Remodeling a bathroom: $20,000 to $38,000
  • Renovating a kitchen: $23,000 to $135,000
  • Garage remodel: $7,000 to $15,000
  • Adding a deck: $19,596

Home improvement projects, while expensive, are often worth it if they increase the value of your home. On average, homeowners recoup 74 cents for every dollar they spend on home improvement when it comes time to sell.

Some of the best renovations for resale value include:

  • Landscaping/curb appeal
  • Adding square footage/ expanding the home
  • Adding a double sink bathroom vanity
  • Adding a kitchen island or walk-in pantry
  • Adding a home office
  • Expanding your outdoor space

7 best ways to finance home improvements

Home improvement projects can be expensive and often require financing. Luckily, several options are available to help you find the best option for your situation.

1. Save

The safest financial option to pay for your home renovation is to save a chunk of money for your project. If you don’t already have a large sum of money saved, this option can mean waiting longer to start your project. But, it also means you won’t have to worry about paying back a loan or large credit card bill once you finish your home renovation.

The amount you need to save depends on what type of renovation you’re doing and the scope of the project. If you’re looking to finance the whole project by saving, it might be smart to start small and take on less expensive projects first. This will ensure that you don’t get in over your head and wind up spending more than you intended.

Benefits Drawbacks
No money to have to pay back Saving can take more time or delay the start
No accruing interest The project may cost more than expected
Your credit score will not be impacted You may not have time to save if the repair is an emergency

2. 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. Most home improvement loans only go up to 12 years maximum. Home improvement loans also have much lower loan amounts, typically up to $100,000 at most, while home equity loans range up to $750,000. Home improvement loans are typically best for small or midsize projects in your home, such as a bathroom makeover or window replacement.

As unsecured loans, home renovation loans typically have higher rates, 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. However, you are not at risk of losing your home if you can’t pay.

Before applying for a personal loan for home improvement, compare the best home improvement loan lenders for low interest rates, competitive fees, friendly repayment terms and quick payouts.

Benefits Drawbacks
Funding is generally fast (within a few days) Lower maximum borrowing amounts.
Many lenders charge no or few fees for home improvement loans. Shorter repayment periods than a home equity loan

3. 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). Because of this flexibility, HELOCs are well-suited for longer, bigger projects.

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.

To borrow against your house, you must have sufficient home equity. Make sure you have at least 15 percent to 20 percent equity in your home. The amount you’ll be eligible to borrow depends on your loan-to-value ratio, or LTV. This score is comprised of your home’s value, the outstanding value on your mortgage and your credit score. Before borrowing, calculate how much your monthly payments will be.

Benefits Drawbacks
Interest may be tax deductible. The Tax Cuts and Jobs Act allows home equity borrowers to deduct interest paid on home equity products if the product was used for home improvement HELOCs come with variable interest rates, meaning that your interest rate can change depending on the decisions of the Federal Reserve.
HELOCs have flexible repayment options for up to 30 years depending on how much you borrow. It can be easy to overspend with a line of credit.

4. Home equity loan

Instead of a HELOC, you could apply for a home equity loan, which is sometimes referred to as a second mortgage. This is a loan paid out in a lump sum that you can repay over a number of years in regular fixed monthly payments.

Home equity loans have much higher borrowing limits and repayment periods than home improvement loans. Home equity loans are also secured, meaning you put your home up as collateral.

Unlike HELOCs, you don’t have to worry about market fluctuations with a home equity loan. Once you lock in your fixed interest rate, you pay the same monthly payment over the life of your loan.

Home equity loans are best suited for medium to large projects. You will need to know exactly how much you need before borrowing, but you can borrow more and have more time to pay back the debt.

Benefits Drawbacks
Fixed interest rates ensure your monthly payment will never change. You must have a good credit score to qualify for the best rates.
Loan interest is tax deductible if you use the funds for home improvement. If your property value declines, you could go upside down on your mortgage.

5. Cash-out refinance

A cash-out refinance replaces your current mortgage with a new, larger loan and gives you a new interest rate. Because 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.

A cash-out refinance is a good option for homeowners who would not be able to afford an additional monthly loan payment without refinancing and who qualify for a better interest rate than they have with their existing mortgage. Because this financing method depends on the state of your current mortgage and comes with added costs, a cash-out refinance is best suited for smaller projects and emergency repairs.

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. 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. The average refinance closing cost in 2021 was $2,398.

Benefits Drawbacks
You can lower your monthly mortgage payment by refinancing The amount you owe will increase with a cash-out refinance, putting you deeper in debt.
If you have an adjustable-rate mortgage, you can change it to a fixed-rate loan. You need to have good to excellent credit to qualify for cash-out mortgage refinancing.

6. 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.

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 cashback 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. 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, the amount you pay in interest could also rise as market conditions shift.

If you are planning to use a credit card for home improvement projects, it is worth looking into store-issued credit cards from places like IKEA or Lowes. These cards tend to have benefits for making purchases within those specific stores.

Benefits Drawbacks
Many cards offer rewards programs to borrowers that benefit you the more purchases you make on the card. You will have to pay back what you borrow within the billing cycle to avoid paying high interest.
You can take out the amount you need as you need it, which can keep you from getting into more debt than necessary. It is easy to overspend and get in a cycle of debt

7. 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.

Examples of approved renovations include installing an appliance or making structural repairs. Your loan can also cover architectural and engineering costs, building permit fees, appraisal fees and inspection fees. These loans do not cover luxury items like swimming pools or outdoor fire pits. You also cannot use this loan to pay for work that has already been done.

Veterans Affairs also offers cash-out refinance loans, which allow you to refinance a conventional home loan and take out cash on the equity of your home. If you can’t make payments, the VA loan guarantee is the “insurance” it provides to your lender.

Government loans tend to have lower interest rates and better terms than regular loans because the government insures the lender against potential loss. Exact rates vary and depend on the lender.

Benefits Drawbacks
You are guaranteed to work with a legitimate lender You must use the loan money for projects that increase the property’s “livability”, meaning that you cannot use the money for luxury items.
You do not necessarily have to be the homeowner to apply for these loans. The Title I loan allows long-term tenants to apply. Each government-issued loan comes with its own eligibility requirements. For the Title I loan, you need a debt-to-income ratio of 45% or less.

Financing for emergency home repairs 

If you need to make emergency repairs to your home and need help covering the immediate costs, you can turn to any of the options mentioned above. In addition to those options, you can take out a homeowners insurance claim. If you have met the deductible and the repair is covered by your policy, this option could save you from having to borrow more money. However, homeowners insurance typically comes with a steep deductible and claims take a while to process.

If you do not have time to wait for an insurance claim to go through, a loan could be your best option. Home improvement loans and credit cards may work best for smaller repairs, but larger repairs may require a home equity loan or HELOC.

Homeowners spent an average of $2,321 on emergency home repairs in 2021. The exact cost depends on the specific repair, as well as the cost and availability of materials and labor. Some examples of emergency repairs include termite damage, which costs $3,000 on average to repair, and water damage, which costs $2,582 on average to repair.

Financing for emergencies with bad credit

If you struggle with your credit and are dealing with a home repair emergency, you may be wondering how you’ll be able to access the funds you need. Luckily, some lenders work with low credit borrowers.

If you’re worried about taking on more debt, it may be a good idea to look into a debt consolidation loan. These loans allow you to combine multiple debts into one payment. This option simplifies your finances, and you have the opportunity to find a loan with lower interest and fixed payments. Debt consolidation loans are available even for people with bad credit.

Before choosing a lender, make sure to compare top debt consolidation loans for borrowers with bad credit.

The bottom line

Financing a home project takes planning. Homeowners should consider all the options and choose the financing path that is best for their project and financial situation. When looking into different loan options, talk to multiple lenders to get the best terms.

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Written by
Hanneh Bareham
Student loans reporter
Hanneh Bareham specializes in everything related to student loans and helping you finance your next educational endeavor. She aims to help others reach their collegiate and financial goals through making student loans easier to understand.
Edited by
Loans Editor, Former Insurance Editor