How to Pay for Home Improvement

There are many reasons you might find yourself considering a home renovation. You may want to make urgent repairs, add value to your home, or even to flip it as an investment project. Home renovations can be a fulfilling way to transform your space and increase your property's worth. However, home improvement comes with a hefty price tag. The average cost of home renovations in the U.S. is around $18,000. Luckily, multiple financing options exist. From home equity lines of credit to personal loans and government loans, there are different ways to fund your next home renovation project.

Cost-Effective Ways to Pay for Home Improvement

There are numerous solutions you can consider to finance your next home renovation. Let's dive deeper into common ways that homeowners use to fund their home renovation costs.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit, or HELOC, is a flexible financing option that allows you to borrow money against the equity you've built in your home. You must have at least 15-20% equity in your home to qualify. A HELOC provides a revolving line of credit, which gives you the freedom to borrow as much or as little as you need, up to a certain limit. You then repay the debt over time. This is essentially a second mortgage that works like a credit card. The credit is available immediately, and you can withdraw the funds at any time.

Benefits	Drawbacks
Lower interest rates: HELOCs usually have lower interest rates compared to credit cards or personal loans, making them a cost-effective option. They're currently offering rates of about 7 - 10%.	Home loss risk: Since your home is used as collateral for the loan, failing to make your payments could result in foreclosure.
Potential tax deductions: The interest you pay on a HELOC is often tax-deductible if you use the money for home improvements, which can provide some financial relief.	Variable interest rates: Most HELOCs have variable interest rates, meaning your rate could increase over time. This can make budgeting for monthly payments difficult.

Home Equity Loan

A Home Equity Loan is another way to tap into your home's equity with a secured loan. Unlike a HELOC, which provides a line of credit you can draw from repeatedly, a home equity loan gives you a lump sum of money up front, which you repay in fixed monthly installments over a set period. This can be a good option if you have a specific renovation project in mind and know exactly how much it will cost.

Unlike HELOCs, home equity loans have fixed interest rates, so you don't have to worry about your monthly payment suddenly increasing.

Benefits	Drawbacks
Fixed interest rates: The interest rate on a home equity loan is usually fixed, which means your monthly payments remain consistent over the life of the loan.	Risk of foreclosure: As with a HELOC, your home is used as collateral, so failing to keep up with your payments could lead to foreclosure.
High borrowing amounts: You can typically borrow up to 80-85% of your home's value, excluding what you owe on your mortgage. This is typically more than you'll be able to get with a personal loan.	Negative equity: If your home's value decreases, you could find yourself in a negative equity situation, owing more than your home is worth.

Read more about the differences here: Home Equity Loan vs HELOC: Choosing the Best Option for Your Financial Needs.

home equity loan interest rates

Credit Cards

Credit cards can be an accessible way to pay for smaller home improvement projects, especially if you can pay off the balance quickly. Some credit cards offer 0% interest for a limited introductory period, giving you the opportunity to pay for your renovation project over time without accruing interest. Keep in mind that once your introductory rate expires, you'll have to pay off your balance in full every month to avoid risk of credit card debt.

If you get approved for a credit card with cash back rewards and perks, you can use those funds to invest in your home remodel as well. Some home improvement retailers like Lowe's even offer their own credit cards, with rewards specific to shopping at their stores.

Benefits	Drawbacks
Easily accessible: Credit cards are easy to use and don't require you to put your home up as collateral, potentially reducing your borrowing risk.	Higher interest rates: If you can't pay off the balance quickly, credit cards often have higher interest rates than other financing options. Current APRs on credit cards are upwards of 20%.
Rewards and cash back: Some credit cards offer rewards points or cash back on purchases, which can help offset the cost of your renovations.	Introductory rates expire: If you don't pay off the balance before the end of the 0% interest period, the remaining balance will start accruing interest at a much higher rate.

Savings

Using cash or dipping into your savings to fund your home improvement project is potentially the most straightforward method for financing your home renovation. There's no need to worry about applying for a loan, waiting for approval, or dealing with interest payments. This approach is particularly ideal if you've been planning your home renovation for a while and have been able to set aside funds specifically for this purpose. However, it's important to maintain a balance and ensure you have enough savings left for emergencies.

Benefits	Drawbacks
No interest or fees: You won't have to worry about paying interest or incurring any loan origination fees, making your home improvement project more affordable in the long run.	Depletes savings: While using cash can be a cost-effective way to finance your renovations, it could significantly reduce your savings, potentially leaving you without a financial safety net for unexpected costs like medical emergencies.
No additional debt: By using your savings, you avoid taking on additional debt. This means you won't have any loan payments to worry about, freeing up your future income for other financial goals.	Limited amount of funds: Your renovation project could be constrained by the amount of money you have saved. This might limit the scale or quality of your renovations.

Personal Loans

Personal loans can be a flexible financing solution for your home improvement project. These are unsecured loans that you can use for any purpose, including home renovations. Because personal loans are unsecured, they don't require you to put up your home as collateral. This can provide peace of mind if you're worried about putting your home at risk. The interest you pay on these loans is dependent on your credit score. If you have a good credit score, it's possibly that you'll be offered a loan with lower interest rates than a credit card.

Many people choose to pay for home renovations with personal loans because they typically offer lower fees than home equity loans or HELOCs. However, keep in mind that the funds are typically capped at around $100,000. In contrast, a home equity loan or HELOC can offer almost $1 million maximum.

We've ranked and compared the Top Personal Loan Providers of 2023.

Benefits	Drawbacks
No collateral needed: A personal loan won't put your home at risk, as these loans are typically unsecured, meaning your home or any other collateral does not back them.	Higher interest rates: Personal loans often have higher interest rates than home equity loans or HELOCs, making them a more expensive option over the long term.
Fixed monthly payments: Personal loans usually have fixed interest rates and fixed repayment periods. This makes budgeting for your loan easier as you'll know exactly what your monthly payment will be.	Shorter repayment terms: Personal loans generally come with shorter repayment terms than other loans, which can mean higher monthly payments. It's important to ensure you can comfortably afford these payments before choosing this option.

home improvement loan amounts

Cash-Out Refinance

If you've built up significant equity in your home and are comfortable extending your mortgage term, a cash-out refinance could be a viable option. This method involves refinancing your current mortgage for a larger amount than you currently owe and taking out the difference in cash. This could give you a sizeable lump sum to fund large-scale renovation projects.

In terms of a cash-out refinance, you need to have at least 20% equity in your home, and you can borrow up to 80% of your home's market value. Consider that when opting for a cash-out refinance, you will be required to cover extra expenses such as appraisal fees and other charges. These costs can quickly add up to 3-5% of the total new loan value. It is crucial to carefully evaluate all the associated expenses and advantages before deciding to pursue this option.

Benefits	Drawbacks
Competitive rates: Interest rates on cash-out refinances are typically lower than those on credit cards or personal loans, potentially saving you significant money over time.	High closing costs: Closing costs can easily add up to several thousand dollars. It's important to factor these costs into your overall budget.
Tax-friendly: Like home equity loans and HELOCs, the interest on your cash-out refinance may be tax-deductible if the money is used for home improvements.	Extended repayment: By refinancing your mortgage, you're essentially starting your mortgage term over. This means it'll take you longer to pay off your home, which could cost you more in interest over the life of the loan.

Government Loans

The U.S. Department of Housing and Urban Development (HUD) provides a Title 1 Property Improvement Loan program for those eligible. These loans, insured by the federal government, can be used for both minor and substantial renovations. They are available for homeowners with little or no equity, making them accessible for a wide range of situations.

HUD Title 1 loans allow you to borrow up to $25,000, and don't require any equity in your home. However, only specific types of renovations are covered by HUD Title 1 loans, and they must be related to improving the livability and safety of your home. Examples include adding wheelchair ramps, energy efficiency upgrades and addressing structural damages. Non-essential changes to your home like installing a swimming pool or elaborate landscaping wouldn't fall under the use cases of HUD loans.

Benefits	Drawbacks
No home equity required: These loans can be used even if you have little or no equity in your home, expanding your options.	Loan limits: The maximum loan amount may not cover the full cost of extensive renovations. It's important to carefully calculate your renovation costs before considering this option.
Longer repayment terms: HUD Title 1 loans can have repayment terms of up to 20 years for single-family homes, providing more flexibility in managing your monthly budget.	Requires approval: Not everyone will qualify for a government loan. The approval process will consider your creditworthiness, income, and the specifics of your renovation project.

Finding Ways to Finance a Home Remodel

There are many ways to pay for home improvement, each with its own unique advantages and considerations. The method you choose should align with your financial situation, the project size, and your comfort with repayment terms. Using available cash or savings might be a great choice if you have enough money and want to avoid taking on debt, while various loan options can provide larger amounts for significant renovations. Remember, a home renovation is not just about making your house look nicer. It's also an investment in your home's value and your personal quality of life. Always take the time to fully research your options and choose that best suits your needs and future financial goals.

Financing Home Remodels with Bad Credit

If your credit score isn't in the best shape, you might wonder how to finance a home remodel. Not to worry – many ways to finance a home renovation project exist. Some lenders specialize in working with individuals with bad credit. They may offer options tailored to your situation. Alternatively, debt consolidation could be a path to consider. It allows you to combine multiple debts into one payment, which may result in a lower interest rate and simplified management of your finances.

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AmeriSave Mortgage

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Quicken Loans

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Conclusion

Exploring your options for financing a home renovation is a crucial step in your home improvement journey; even with less-than-perfect credit, solutions are available. From using savings to exploring different loans, the key is to find a method that matches your financial circumstances and the scale of your project. By carefully considering your options, you're investing in the aesthetic and functional upgrade of your home and contributing to its overall value, enhancing your quality of life in the process.

Article Topics

Mortgage Loans

Personal Loans

Written by Matthew Levy

Matthew is a freelance financial copywriter with 14+ years in financial services. He holds a Bachelor of Science degree in Economics with business and finance options and is a CFA Charterholder. He is from Vancouver, Canada, but writes from all over the world.