Whether you’ve been in your home for decades or just a few months, sometimes it needs a little extra love. But home improvement financing — from massive overhauls to little fixes — isn’t always available in your bank account. Luckily, you have a few different options to pay for home renovations if your cash flow is running low.
The best ways to pay for home improvements include:
- Home improvement loans.
- Home equity lines of credit (HELOCs).
- Home equity loans.
- Mortgage refinances.
- 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 or not financing makes financial sense, you’ll need to consider your monthly budget, the return on investment of your project and the size of your project. Are you in a place where you can make another monthly payment? Does the project you’re planning on executing increase the value of your home? How long will this renovation take? If you’re in good financial health and the project you’re planning will increase the value of your home, the extra cost of financing could be worth it.
6 best ways to finance home improvements
If you’ve decided that refinancing is right for your home renovation, you have a number of options to choose from.
1. Home improvement loans
Home improvement loans are unsecured personal loans offered by banks, credit unions and a number of online lenders. Because they are unsecured, you don’t need to use your house as collateral to qualify. Your interest rate and qualification are based on your credit score, and funding comes quickly; once you agree to the terms, many lenders deposit money straight into your account in as little as a day.
Because home renovation 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 mid-sized projects in your home, such as a bathroom makeover or window replacement.
However, keep in mind that because they’re unsecured loans, 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. Before applying, compare the best home improvement loan lenders that offer low interest rates, competitive fees, friendly repayment terms and a quick payout.
2. Home equity lines of credit (HELOCs)
HELOCs are a popular way to finance home improvements. 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. For ongoing or lengthy home renovation projects, a HELOC may be a good option.
However, because you’ll have to put your home up as collateral, your home 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: In order to borrow against your house, you must have sufficient home equity. Before considering a HELOC, make sure the value of your home is significantly higher than the amount you still owe on your mortgage.
3. Home equity loans
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 these 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 way to finance your renovation, since you’ll receive all funds upfront. 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. Mortgage refinances
Refinancing replaces your current mortgage with a new one and gives you a new interest rate. Since you get to pocket the difference if the new loan is bigger than the old one, you could use those extra dollars from a cash-out refinance to make your home improvements. A rate-and-term refinance may offer lower interest rates and fees, but you won’t receive funds like you would with a cash-out refinance.
If you’re considering 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’re going to be extending the life of your loan, meaning it will take you longer to pay it off. As a general rule of thumb, refinancing is only a good idea if you can secure a lower interest rate than what you pay now. If not, it’s not really worth it.
5. Credit cards
If you’re making minor updates to your home, like upgrading a bathroom vanity or installing a new closet system, using your credit card might be one of the best ways to finance home improvements. 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 back your balance before the introductory offer expires, you could face exceptionally high interest rates — much higher than other home improvement loan options. And if you don’t use an introductory offer card and use your regular card instead, you’ll need to pay back the entire amount by your next pay period — 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
Another option for home improvement financing is government loans. If you qualify for a government loan, you could save on the cost of interest and insurance.
One type of government loan is a HUD Title 1 Property Improvement Loan. You can borrow up to $25,000 without having any equity in your home. This is a good option if you’ve recently purchased your home and need to make some upgrades. However, the money must go toward renovations that improve the livability of the home, and some upgrades may not qualify.
Veteran 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.
Summary: Best ways to pay for home improvement
The best way to pay for your next home improvement project depends completely on the project you’re planning and your financial situation.
- If you’re looking to tap into your existing home equity and are planning a mid-sized to large project, a home equity loan or a HELOC may be a good solution.
- If you’re planning a mid-sized project but are uncomfortable with putting up your home as collateral, a home improvement loan could be the way to go.
- If you’re wanting to save on interest for smaller projects and you can pay down the balance quickly, a 0 percent APR credit card can be a great way to finance.
- If you’re wanting to save on interest for a larger project, refinancing your mortgage could be a good option.
- If you want to improve the livability of your home, a HUD Title 1 Property Improvement Loan may also help you save on interest and insurance costs.
Regardless of which route you take, it’s always a good idea to thoroughly research all of your options or find a trustworthy financial planner to help you make the best decision for your finances.