6 Options for Financing Your Home Renovation Project
Home renovation can be expensive, especially if you’ve got big dreams or a lot of work that needs to be done. While paying cash for your renovations is always preferable, it isn’t feasible for everyone.
If you’re considering a home renovation project of any scale, large or small, here are 6 options you have to finance the endeavor:
Home Improvement Loans
Home improvement loans are unsecured personal loans – meaning they don’t require you to put up your house or car as collateral – offered by banks, credit unions, and online lenders.
The interest rate you receive depends on your individual qualifications when you apply, including your credit score. If you have a better credit score, your interest rate will be lower and you may qualify for more financing than someone who has a lower credit score.
Once approved, many home improvement loans give you funding quickly, often within a day. This makes them great options for anyone looking to break ground on their renovation project quickly.
Because a home improvement loan is unsecured, you likely will pay an overall higher interest rate than other types of lending options, as the bank is taking a bigger risk without having collateral to back up your loan. Additionally, home improvement loans often have shorter repayment terms than other loans, so you either have to be prepared to make larger payments over a shorter period of time or borrow less money to keep payments lower.
Home Equity Line of Credit (HELOC)
A home equity line of credit is a popular method for financing home improvement projects.
With this line of credit, your home is used to secure your borrowed money. What makes a HELOC different from a traditional loan is that it is a revolving line of credit; you can utilize up to the amount the bank allows you to borrow, and then borrow more as you repay the line of credit.
Because they are revolving, HELOCs are commonly used for long-term or expensive home improvement projects. They allow work to be done and predictable payments to be made without having to borrow the entire cost of the project all at once.
In order to qualify for a HELOC, you must have put significant equity into your home – in other words, you must have paid down a fair portion of your home loan compared to what your home is worth. This helps the bank feel more secure in lending you the money.
If you default on repaying your HELOC, however, the bank can foreclose on your home, making them risky for some borrowers.
Home Equity Loan
Similar to a HELOC in that you must have significant equity in your home, a home equity loan differs in one significant way: You borrow a set amount of money, just once, from your bank.
Rather than the revolving credit that comes with a HELOC, a bank extends a home equity loan as one-time payment, meaning you must either find ways to pay cash for anything over the loan’s limits or you must apply for another loan if your project becomes more expensive.
Home equity loans are secured loans with fixed rates, making them more predictable for borrowers who don’t want to worry about the potentially fluctuating market rates that come with a HELOC. However, there is a tradeoff as there is less flexibility in your payments with a home equity loan than there is a HELOC, which can make meeting loan payments difficult in times of financial stress.
If you know exactly how much your home improvement project will cost and you already have significant equity invested in your home, a home equity loan may be the right choice.
For homeowners who want to take advantage of lower interest rates and get some cash for their renovation project, a cash-out mortgage refinancing may be a good choice.
In a cash-out refinance, you essentially start your home mortgage all over again – for 10, 15, or 30 years depending on your terms – at a new interest rate and reduced total loan amount. You then receive the difference you’ve paid into your home in a check that you can then use to pay for your renovation project.
Refinancing your home doesn’t come without costs, though. You will have to pay for a new appraisal, origination fees, and other fees associated with the refinance, which can reach into the thousands of dollars out of pocket.
Carefully consider the drawbacks of refinancing your home if you intend to use this method to finance your home improvement project. Unless you are refinancing for a shorter loan term than you originally had, you will be extending your home loan payments by a number of years, making the amount you pay increase over time.
And, unless you are able to secure a lower interest rate, refinancing your home isn’t really worth all the trouble.
For smaller home renovation projects, you may be able to turn to credit cards to float these bills.
However, this method of financing can be a slippery slope with high interest rates and compounding fees that may put you into greater financial trouble over time than the immediacy of the renovations is worth.
Depending on your intended improvements, there may be some government loans available to you.
HUD Title 1 Property Improvement Loans are geared toward people who have recently purchased a property and need to make improvements to increase the home’s livability. These loans can give you up to $25,000 to make improvements. However, because they are intended for projects that are meant to make a home more livable, not all upgrades will be covered.
Expert Home Renovations in MD & PA
At Irvine Construction, we have made it our life’s work to help homeowners get the property they’ve always wanted. No matter how big or small a renovation project, our team of skilled professionals can help bring your vision to life. Schedule a consultation today!