The Best Way to Finance Home Renovations

Renovations can improve the functionality of your home, increase your pride of homeownership, and boost its value.  We’re going to take a look at the best way to finance home renovations. Whether you’re doing renovations to make it more comfortable and beautiful for yourself or you plan to put it on the market, how to finance those home renovations is a key question.

Although some renovations can be done on a tight budget, others, such as complete kitchen remodels and second-story additions, can run into tens of thousands of dollars and more. In this guide, we will talk about home renovation financing, what the best options are, and how to choose which one is right for you.

Home Equity Line of Credit

A home equity line of credit (HELOC) is a common way of financing home renovations. As the name implies, the equity you have in your home serves as the collateral for your line of credit. Typically, a lender will allow you to borrow up to 85% of your equity.

Similar to a credit card, you borrow from your line of credit as you need it, and repayment is flexible. Interest on a line of credit is variable, but it is typically lower than personal loans and almost always lower than credit cards.

A line of credit gives you a lot of flexibility, but it does require that you have enough equity in your home to cover the improvements you want to make. This type of home renovation financing is ideal for ongoing renovations or renovations that will be happening in stages.

Refinancing

Refinancing is essentially replacing your current mortgage with a new, larger one. With this loan, you pay off your old mortgage, and you use the balance for financing your home renovations. Refinancing is ideal when interest rates on mortgages are low.

With this type of home renovation financing, you get the funds as a lump sum, and you can invest the portion of it that you don’t need right away, which allows you to earn some income on it.

Note that refinancing your mortgage is not the same as getting a second mortgage, which is covered below.

Personal Loan

Personal loans are the best way to finance home renovations that are relatively small, like finishing a basement, making your home more environmentally friendly, or remodeling a bathroom.

Lenders don’t usually require collateral for a personal loan, so approval is generally faster. The downside is that interest rates tend to be higher for personal loans than for mortgages or lines of credit.

Second Mortgage

A second mortgage is different from refinancing, as you are stacking an additional mortgage on top of your existing one. This can have a few advantages. First, you will be keeping the original timeline on your existing mortgage rather than extending it. Second, if the interest rate on mortgages is higher when you take out the second mortgage than it was for the first one, you will be saving on the interest. Finally, the closing costs and fees are much lower on a second mortgage than on a refinance.

On the downside, second mortgages do still have appraisal fees and closing costs. Needless to say, you will have two mortgage payments rather than just one, although you can time them, so the payments are due on the same day.

As an option to refinancing, second mortgages can be a great way of financing home renovations, especially large ones.

Credit Cards

Financing home renovations with a credit card should only be for small projects like smart-home upgrades, painting or deep cleaning. Since the interest rate on credit cards is so high, stick to using them for things you can pay off at the end of the month.

Borrowing from Family or Friends

If you have generous relatives who can be flexible with terms, you can get some of your home renovation financing from them. Be sure to put everything in writing, preferably with the help of a lawyer, to ensure there are no misunderstandings or disputes that could harm the relationship.

Use Your Savings

If you have cash set aside, using it gives you a lot of freedom and flexibility. Just make sure you’re leaving enough in the bank for emergencies, so you don’t have to borrow if something major happens.

The Benefit of Sweat Equity

If you want to lower your home renovation financing costs, consider doing some of the work yourself or recruiting friends and family to help. You can even get professionals to assist you if you have skills you can trade for theirs.

Many home improvement stores offer free courses to teach you how to do relatively simple things on your own, such as painting and installing tile. Needless to say, you should stick with a professional for work that absolutely must be correct, such as electrical work and most plumbing jobs, as well as dangerous undertakings such as roofing work and anything involving heavy equipment.

The Best Way to Finance Home Renovations

The best financing strategy depends on the size of the project, your timeline, and your financial situation.

• For large projects, consider a home equity line of credit or refinancing your mortgage.
• For smaller upgrades, save on fees by using a personal loan or your savings.
• Compare interest rates, terms, and repayment plans before deciding. If in doubt, consult with your financial planner.

Here is a quick comparison of your home renovation financing options: