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.
Best ways to finance home improvements
1. Personal loans
Getting a personal loan is a great option for mid-size projects on your home, such as a bathroom makeover or window replacements. Whether you’re hiring a professional contractor or doing the work yourself, a personal loan can help offset some of the costs or pay for the entire project.
There are many advantages to personal loans. First and foremost, they’re easy to find. You can apply for a personal loan through banks, credit unions and a number of different online lenders. Before applying, compare the best personal loan lenders that offer the lowest interest rates, smallest (or no) fees, friendly repayment terms and a quick payout.
Personal loans are unsecured loans, which means 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.
However, since personal loans are based on your credit score, it’s possible you could qualify for a loan with a very high interest rate if your creditworthiness is rated fair to poor. Some lenders also charge fees for application processing, late payments and even prepayments. When reviewing personal loan lenders, take note of which providers charge fewer fees for home improvement loans with bad credit.
2. Home equity line of credit (HELOC)
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. It’s a stream of 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, you’ll have to put your home up as collateral. This is why interest rates are lower with HELOCs — you’re using your home to secure the funds. If you don’t make payments on time, your home could be foreclosed. And most HELOCs 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, a term that describes a home with an appraised value higher than what’s owed on the home. 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 loan
Instead of a HELOC, you could apply for a home equity loan, 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 can serve many purposes in addition to home improvement financing, such as making a large purchase (like a car), completing a major project or consolidating debt.
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 is you might face higher interest rates with home equity loans compared to other options like refinancing.
If you know exactly how much your project will cost, a home equity loan might be perfect for your needs. You won’t have to worry about taking out more than you need and paying interest on it. 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. Refinance your mortgage
Wondering how to finance home improvements without taking out an additional loan? 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.
People choose to refinance for many reasons. If you’re refinancing when there’s been a drop in rates, you could secure a lower interest rate than what you’re paying now. While most of the cash you get can go towards your home renovations, you might even have enough left over to pay down other debt or stash cash in an emergency fund.
If you’re considering refinancing, be aware of some hidden drawbacks and fees. 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% 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.
But don’t jump into making large home improvement purchases on a credit card just because you can. 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
A final 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 towards 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% of the value of your home. In the event you can’t make payments, the VA loan guarantee is the “insurance” it provides to your lender.