How to Finance Your Home Improvement Projects

Whether you’ve been in your home for years or just a few months, sometimes it needs a little TLC. But the money for home improvements isn’t always available in your bank account. With so many ways to borrow and finance your next home project, it can be hard to know which financial product is best.

A home improvement loan can be any type of financing you get to pay for a home improvement project. The best way to pay for your project depends on factors like your home equity, credit, and goals for the project. Read on to determine which type of loan is right for you.

Your Options to Finance Your Home

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. Here are some various options if you’ve decided that financing is right for your home renovation project.

1. Home Remodel or Home Repair Loan

Typically, “home improvement loan” refers to an unsecured personal loan you use to pay for the renovation. 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.

Home repair loans and remodel loans typically have shorter repayment timelines, lower loan amounts, and fewer fees than other options. They’re typically best for small or midsize projects in your homes, such as a bathroom makeover or window replacement. However, keep in mind that because they’re unsecured, home renovation loans typically have higher rates than home equity loans, especially if you have fair or poor credit.

2. Home Equity Loan

A home equity loan is a type of loan in which the borrower uses the equity of his or her home as collateral. The loan amount is determined by the value of the property, and the value of the property is determined by an appraiser from the lending institution. Sometimes, this is referred to as a “second mortgage”. With home equity 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, but because of this, there’s less flexibility.

If you know exactly how much your project will cost, a home equity loan could be the perfect remodel loan option since you’ll receive all funds upfront. However, missing payments can significantly hurt you financially. Since this type of loan also uses your home as collateral, your home could be foreclosed if you fall too far behind on payments.

3. Cash-out Refinance

Cash-out refinancing occurs when a loan is taken out on property already owned, and the loan amount is above and beyond the cost of the transaction, the payoff of existing liens, and related expenses. Since 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.

Consider the drawbacks of refinancing 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. Refinancing is only a good idea if you can secure a lower interest rate than what you pay now.

4. 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 cashback perks.

If you can’t pay your balance back before the introductory offer expires, you could face exceptionally high interest rates which are much higher than other home remodeling loan options. And 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 if you want to avoid interest.

Should You 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, emergency expenses and larger renovations can make financing necessary.

To determine whether home improvement financing makes sense, you’ll need to consider your monthly budget and your project’s size and return on investment. Are you able to make another monthly payment? Will the project you’re planning increase the value of your home? How long will this renovation take?