There are so many things you want to do with your home. Maybe a kitchen makeover? Or perhaps a whole new extension altogether? The ever-present question is: how are you going to fund it?
Unless you have an unlimited amount of money, paying for a home renovation is not always easy. Simple upgrades that cost $2,000 or less are easy to charge on a credit card. But when it comes to major renovations like remodeling your kitchen or building a deck in the backyard, it’s likely going to cost a pretty penny.
So, how do you fund your next home renovation? There are quite a few options that you have, which we will go over in this article.
1. Save up
Perhaps the easiest way to pay for a home renovation is with hard cash. By paying with cash, you won’t have to worry about things like taking out a loan and the interest that comes with it. You also have a higher chance of securing discounts from suppliers and contractors if you pay in full with cash.
If renovation is not a dire need, save up for it instead of financing. This saves you the hassle of applying for loans, shelling out monthly payments, and calculating interest. However, saving up may not be a viable option for everyone (for obvious reasons). Still, it’s a recommended route if you have the means to build up your renovation fund before putting your plans in motion.
Key advantages: You don’t need to apply for loans or pay back a large amount of money. You may also have a better hand at bargaining since you will be paying in cash.
Key disadvantages: Saving can take up a long time, especially if planning a big renovation project.
2. Home equity loans
A home equity loan will allow you to borrow against your home’s equity. It is often referred to as a second mortgage. When you take out a home equity loan, the funds will be given to you in a lump sum, which you can pay back over a certain number of years (usually 15 to 30 years) in fixed monthly payments.
It is also important to note that market fluctuations do not matter for home equity loans. Once you have your fixed interest rate, your monthly payments will remain the same throughout the life of your loan.
If you know exactly how much your renovation project will cost, a home equity loan is an excellent option for you since you will receive the entire loan upfront. However, consider that taking out a home equity loan means you put your home as collateral. If you default on your payments, you could risk losing your home to foreclosure.
Key advantages: Interest is fixed, and you receive the total loan amount all at once.
Key disadvantages. Since you use your home as collateral, you could risk foreclosure if you fall behind on payments. Interest rates may also be higher than a regular mortgage.
3. Home equity line of credit (HELOC)
Like a home equity loan, a HELOC allows you to borrow against your home’s equity. To qualify for one, you must have substantial equity in your home. Most lenders require borrowers to have at least 15 to 20% equity before taking out a HELOC.
Furthermore, this type of loan often comes with a variable interest rate, meaning the interest you pay over the life of the loan can increase, depending on market conditions. Most lenders require you to pay back the loan within 8 to 10 years, depending on the type of program you choose.
The major difference between a HELOC and a home equity loan is that with HELOC, you receive your funds through a line of credit instead of a lump sum. This means that you can withdraw only what you need whenever you please until you exhaust your borrowing limit, which is a great advantage if your renovation project will last for many months.
Key advantages: You can only take what you need when you need it, making budgeting easier.
Key disadvantages: Most HELOCs come with adjustable interest rates, which means you won’t be paying the same amount of interest over the life of the loan. Like a home equity loan, a HELOC also uses your home as collateral, meaning there is a risk of foreclosure if you fall behind on payments.
4. Home remodel or repair loan
Home remodel or home repair loans are unsecured personal loans that don’t require your home as collateral. They are offered by banks, credit unions, and some online lenders.
When applying for this type of loan, your credit score plays a big role. Lenders will base your interest rate and borrowing limit mainly on your credit score as it is a common basis for how reliable you are as a borrower. But because home improvement loans are unsecured, they typically carry larger interest rates than HELOCs and home equity loans. Moreover, lenders may charge additional fees on prepayments, processing, and late payments.
Key advantages: You don’t need to have equity to qualify for a home remodel or repair loan, nor do you have to put your home as collateral. Funding also typically comes quickly, depending on the lender you choose.
Key disadvantages. Interest rates are generally higher than home equity loans and HELOCs because home improvement loans are unsecured, especially if you have poor credit. There is also a possibility of paying extra fees for processing, prepayments, and late payments.
5. Cash-out refinancing
A cash-out refinance replaces your existing mortgage with a bigger loan with a new interest rate. You get to keep the difference between the old and new loans, which you can use for renovation projects and other expenses.
Refinancing your mortgage usually comes with significant expenses, such as origination fees, appraisal fees, taxes, and closing costs. Another important thing to note is that if you don’t get a new loan with a shorter term, you will be extending the amount of time it will take to pay off your mortgage.
On the flip side, you don’t have to repay another loan on top of your current mortgage, unlike when you take out a home equity loan or a HELOC. You can also get to lower your current interest rate through refinancing, especially if you have an adjustable-rate mortgage.
Key advantages: You don’t add another monthly payment on top of your mortgage. You may also get to lower your current interest rate.
Key disadvantages: It may take longer to pay off your loan.
6. Government loans
There are several loan programs that the government offers to specifically qualified individuals. For example, the HUD Title I Property Improvement Loan allows homeowners to borrow up to $25,000 for home repairs and improvements, regardless of home equity.
Another example is the Weatherization Assistance Program (WAP), which provides households under a certain income with free weatherization. The WAP can help families improve their heating, cooling, and electrical systems and upgrade energy-consuming appliances.
If you are eligible for a government loan, there is a good chance you’ll save a substantial amount of money on the total cost of the renovation, insurance, and interest.
Key advantages: Government loans generally have lower interest rates than private loans.
Key disadvantages: There are specific criteria that you must meet to qualify for government loans. For example, homeowners that want to take out the HUD Title 1 Loan must have a debt-to-income ratio of 45% or less, own the home or have a long-term lease, and verify that the loan proceeds were used for intended improvements, among other requirements.
7. Reverse mortgage
A reverse mortgage is similar to a HELOC and home equity loan because it allows older homeowners to borrow against their home equity. However, the loan only becomes due when the last remaining borrower dies or moves away permanently. Moreover, the borrower no longer has to pay the mortgage, unlike with a HELOC or home equity loan.
Most borrowers who take out reverse mortgages use the proceeds as retirement income, but the money from a reverse mortgage can also be a source of funds for home renovations. To do this, you can either take out the proceeds all at once or opt for a line of credit. If you know exactly how much your project is going to cost, choosing to receive the loan as a lump sum is the better option. On the other hand, if you are unsure about the cost of your project or want to set limitations, opening a line of credit may be wiser.
Similar to HELOC, you must have substantial home equity to qualify for a reverse mortgage and be at least 62 years old. You also have to comply with certain loan obligations to prevent the loan from becoming due too early, including occupying the home as your primary residence and paying homeowner’s insurance, maintenance, and taxes.
Key advantages: A reverse mortgage only becomes due when the last borrower dies or moves away permanently, and monthly mortgage payments cease. You also get to retain ownership of the home unless you decide to sell.
Key disadvantages: You have to be at least 62 years old and have enough home equity to qualify.
8. Credit cards
Charging renovation costs on your credit cards may not be a good idea if you’re doing a major project. For one, carrying that amount of credit card debt is risky and can ruin your credit score if
you miss a payment. But if you’re only making minor upgrades to your home, such as installing a new shower or rebuilding your closet, using your credit cards is the easiest and smartest option.
A good tip is to get an interest-free credit card for the first few months and use that to pay for home upgrades. If you don’t want to get a new card, paying for home upgrades using your regular cards can help you earn more rewards and perhaps even cashback benefits.
Key advantages: Financing minor home upgrades with credit cards is easy and fast. You could also save on interest by getting a card with an introductory interest-free offer.
Key disadvantages: Paying for large renovation purchases with credit cards carries a significant amount of risk. You’ll also have to pay back your whole bill by the next cycle if you want to avoid interest.
Conclusion
To sum it all up, the best way to fund your next home renovation depends on several factors, including:
- The cost of your project
- The amount of debt you’re willing to carry
- Your financial status
| Savings | Home Equity Loan | HELOC | Home Renovation or Repair Loan | Cash-out Refinance | Government Loan | Reverse Mortgage | Credit Cards | |
|---|---|---|---|---|---|---|---|---|
| Interest | No interest | Fixed interest | Variable interest | Can be higher than home equity loans and HELOCs | Can be higher or lower than your current interest rate | Typically offers lower interest rates than private loans | Fixed or variable, depending on the loan type | Some cards are interest-free for the first few months |
| Borrowing Limit | Depends on your home equity | Depends on your home equity | Depends on your credit score and other financial factors | Can go as high as 125% of loan to value |
Depends on the type of loan; HUD Title 1 loans allow homeowners to borrow up to $25,000 |
Depends on your home equity | Depends on your credit card limit | |
| Repayment | Within 5 to 30 years | Within 5 to 30 years | Depends on the lender | Within the rest of the loan life | Depends on the type of government loan |
Loan becomes due when the last borrower dies, defaults on the loan, or moves away permanently |
Based on your billing cycle | |
| Key Requirements | Substantial equity | Substantial equity | Credit score | Credit score | Income must fall below a certain amount, citizens hip status, etc. | Borrower must be 62 or older; substantial home equity | Income, credit score | |
| Best for | Homeowners who can wait long enough to save what they need |
Borrowers who have substantial home equity and need their funds all at once |
Borrowers who have substantial home equity and are unsure how much the project |
Borrowers who don’t have substantial home equity and know exactly how much |
Homeowners who want to can’t afford an additional monthly payment on top of the |
Borrowers who meet loan requirements |
Retirees that are at least 62 or older and want to eliminate monthly mortgage payment |
Homeowners who plan to do only minor upgrades to their home |