How to Finance a Home Renovation Project

Home renovation vs. remodeling

The terms “home renovations” and “home remodeling” are often used interchangeably, but they are actually slightly different.

• Renovations typically involve restoration work, such as repainting, replacing fixtures, updating old or outdated items, or other small-scale projects that improve a home’s appearance but don’t change the layout.
• Remodeling is when you change a home’s structure or layout such as removing a wall, raising ceilings, finishing a basement, or related projects.

While renovations typically cost less than remodeling, they can range significantly in price depending on the project, how much of your house you’re renovating, how old your home is, and other factors.

Using a personal loan for home renovations

Whether you’re preparing your home to put it on the market for sale or simply want to improve the look of your space, some home renovations may be the answer. Before you even start your projects, one of the first steps should be figuring out how you’re going to pay for it.

Renovations may be cheaper than remodeling, but expenses can still add up. Unsecured personal loans can help homeowners finance their project quickly at a lower cost than some other financing options.

Personal loans:

• Are unsecured, meaning they do not require any collateral.
• Have fixed interest rates, so your monthly payments will stay the same and you’ll be able to calculate how much you’ll pay in interest over the life of the loan. This makes them easier to budget for.
• Have loan terms typically ranging from two to seven years. Shorter terms have higher monthly payments but you’ll pay less in interest, while longer terms have lower monthly payments but you owe more in interest over time.
• Have interest rates typically ranging from 6% to 36%, but the rate you’re offered depends on factors like your credit score and history, income, debt-to-income ratio, and others. The better your score, the lower the rate you’ll get.
• Can be applied for through a bank, credit union, or online lender.
• Have fast approval and funding processes, sometimes even within one or two business days.
• Come in a lump sum and can range from $1,000 to $100,000.

Most online lenders allow you to get prequalified without impacting your credit score to see your potential rate, loan amount, and monthly payment. Getting prequalified can help you compare lenders more accurately.

Other ways to finance a home renovation

When comparing personal loans, keep in mind there are also other options that can help you finance your renovation projects.

1. Credit cards

You can use your credit card to purchase items like paint, fixtures, furniture, or similar items that can help with your renovations. If you stay under your credit limit, you may be able to use your credit card for all your purchases. And, if you have a rewards card that earns you cash back or points/miles, you can get even more out of these charges.

If you have good to excellent credit, another option can be to apply for a 0% intro APR credit card. These cards do not charge interest on outstanding balances for a certain period, sometimes up to 24 months.

Whether you have a 0% intro APR card or a different credit card, it’s important to pay off the balance in full each month (or at the end of the intro period). Otherwise, the outstanding balance will accumulate interest at a high percentage rate, which can quickly lead to a credit card debt spiral.

2. Home equity loan

If you own your home, a home equity loan (HEL) can be a financing option allowing you to borrow against the equity in your home. Essentially a second mortgage, the loan amount is based on the difference between the home’s current market value and the outstanding mortgage balance due. In most cases the interest rate is fixed, and the funds are provided in a lump sum to be used for renovations, then repaid each month over the term.

With an HEL, your house is used as collateral. This means if you default on the loan, you could lose your home, but it also means interest rates may be lower for well-qualified borrowers and these are easier to qualify for than some personal loans. And interest payments may be tax deductible if money is used for home improvements.

Other than the risk of losing your home, if the value declines, you could owe more than your home is worth. You may not be able to net as much if you sell your home, interest rates are much higher for borrowers with poor credit, and you may have to also pay closing costs and fees.

Learn more: Home Equity Loans

3. Home equity line of credit

A home equity line of credit (HELOC) allows you to gain access to a line of credit that’s secured by your home. Functioning like a credit card, you can borrow on your HELOC as needed but cannot take out more than your credit limit. Then, you can use the funds however you want (and interest spent on home improvements is tax-deductible).

The advantages of HELOCs are you only borrow and pay interest on the money you actually need, and interest rates can be lower than credit cards and personal loans. On the other hand, you may owe fees and the interest rates are variable, meaning they can increase or decrease over time. If you default you could lose your house, and unlike a credit card, the draw period is for a limited time.

Learn more: Home Equity Line of Credit

4. Cash-out refinance

A cash-out refinance can be a way to finance home renovation expenses. This financing replaces your current mortgage with a new, larger mortgage. You receive the difference in value between the old and new mortgage in cash, which you can spend on anything you’d like. This replaces your old mortgage payment with a new one, but you may be lengthening the amount of time you’ll be in debt due to changing the loan’s terms.

The advantages of a cash-out refinance are potentially lower interest rates, it can increase your credit score, and the interest may be tax-deductible if used for home improvement costs.

Learn more: How does a cash-out refinance work?

5. Government loans

The government offers FHA Title 1 loans to help homeowners finance permanent property improvements and renovations, such as purchasing appliances or making your home more accessible or energy efficient.

You can borrow up to $25,000 for a single-family home, and repayment terms can range from six months to 20 years. Note that loans above $7,500 require you to use your home as collateral, and you also must be living in the home for at least 90 days before you can borrow anything. There are also other requirements you may need to meet.

Title 1 loans have fixed interest rates and are repaid via monthly payments over the term. Not all lenders offer these loans, but they can help make projects more affordable.

6. Personal savings and cash

Using your savings and cash can help ensure you don’t go into debt to fund your home projects. Setting money aside each month to put toward your home improvements can help ensure you have the savings you need to tackle the project when you’re ready. You can also break purchases up over time to avoid breaking the bank and ensure the project fits into your budget.

If you use savings and cash, make sure you still have a solid emergency fund and don’t exceed your monthly budget, causing you to go into debt in other areas.

What should you consider before financing home renovations?

If you’re considering funding home renovations with financing like a personal loan, the first question to ask yourself is what monthly payment you can afford. You should also check your credit score and history so you can take steps to improve them if necessary.

Also consider the estimated cost of the renovations you want to do. How much financing will you need? When adding accumulated interest and fees, does the monthly payment fit into your budget? Is the total cost worth it for the project?

Next, start researching financing options and lenders. Compare the pros and cons of the different financing options, such as personal loans, HELs, HELOCs, or cash-out refinancing. Will your credit qualify you for a low interest rate? Do you have enough equity in your home to make an HEL or HELOC worth it?

When comparing lenders, check things like interest rates, loan amounts and terms, fees, customer service reviews, and minimum qualifications. If you can, get prequalified before applying to get a better idea of interest rates you’d qualify for.

When is it a good idea to finance a home renovation?

Financing a home renovation can be a good idea if:

• You have a stable income.
• You have a good credit score (at least 660 or above).
• Your debt-to-income ratio is low (below 36%).
• You are able to comfortably factor new monthly payments into your budget.
• You don’t have the savings or cash to fund renovations and can’t or don’t want to delay your projects because of it.

Is financing home improvements right for me?

Knowing if financing your home improvements is right for you depends on your personal situation. Analyze your current budget and debt situation, research and compare loan options, and decide based on what you can afford and will not negatively impact your long-term financial security.

When should you not finance home renovations?

Even if you have home renovation projects in your mind, it may not always be a good time to finance them. In fact, it’s a bad idea if you don’t have a secure income, you spend more than you earn, you have a high debt-to-income ratio, or you have a poor credit score.

Keep in mind that taking on more debt can negatively affect your credit score, especially if you miss payments. Not only can this make securing financing more difficult in the future, it can also make it very difficult to get out of debt.

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