How to Pay for Home Renovations and Improvements

Fact checked by Suzanne KvilhaugReviewed by Katie Miller

Whether you want to have a trendy kitchen with a beverage station and quartz countertops or improve the structure and safety of your house, home renovations can keep you in a home or neighborhood you love longer, save you money in the long run, and hopefully reduce stress.

Whatever changes you intend to tackle, there are many options to help homeowners pay for renovations and home improvements, including cash savings, home equity or home improvement loans, and even some alternative financing options. The best payment option for your renovation will ultimately depend on your plans and financial situation.

Key Takeaways

• Homeowners have various financing options available to fund home renovations and improvements, including but not limited to cash savings, home improvement loans, home equity loans, or a home equity line of credit (HELOC).
• Budgeting, project planning, and careful consideration of options are crucial when financing home renovations.
• Home equity loans and HELOCs will have lower interest rates than home improvement loans.
• Homeowners must consider factors such as eligibility criteria, interest rates, repayment terms, and pros and cons when choosing a financing option.

How Much Do Home Renovations Cost?

Budgets for home renovations and improvements are about as personal as a fingerprint, but there are some estimates that homeowners can use to plan.

The median spending on home renovations and improvements in 2021 was $18,000, with the top 10% of homeowners spending as much as $100,000. Note that high or rising inflation (like what we’ve seen since 2021) can increase the cost of materials, too.

If your palms are starting to sweat, don’t worry. There are many ways to finance your next home improvement project that don’t involve letting go of those classic vinyls. Let’s get into it.

Ways to Finance Your Renovations or Improvements

• Cash
• Home improvement loan
• Cash-out refinance
• Home equity loan
• Home equity line of credit (HELOC)
• Title I Property Improvement Loan Program
• 203(k) Rehabilitation Mortgage Insurance Program
• Crowdfunding
• Peer-to-peer lending
• Community grant

Cash

The lowest-cost option for your home renovations will always be paying cash. It saves money on accruing interest, requires no collateral, and won’t impact your credit score.

Unless you are independently wealthy, saving for your home improvement project may take some time, but that gives you more time to plan.

Home Improvement Loans

Home improvement loans allow homeowners to finance home improvement projects without using their homes as collateral. However, because this type of loan is not secured, repayment time frames are often shorter and interest rates are usually higher than rates on a secured loan, such as a home equity loan or home equity line of credit (HELOC).

Borrowers wanting a home improvement loan should head to their bank or preferred lender to start the application process. The lender will decide if your credit score meets their criteria, and they will present the loan terms to you. Homeowners can expect to pay an interest rate based on their creditworthiness.

Cash-Out Refinance

Cash-out refinance is another option that homeowners have to pay for home renovations. It involves homeowners taking out a new, bigger mortgage to pay off the old one, and using part of the difference to pay closing costs. After closing costs, the rest of the money is theirs for what they like. 

Home Equity Options

Home equity options like home equity loans and home equity lines of credit (HELOCs) are great for homeowners whose houses are worth more than they owe on them.

Home equity loans and HELOCs allow homeowners to borrow up to a percentage (usually 80%) against the value of their home while using their home as collateral for the loan. Because the loans are secured, home equity loans and HELOCs usually carry lower interest rates than non-collateralized home improvement loans.

With a home equity loan, the borrower and lender agree on a lump sum that the homeowner receives upfront for their intended purpose—in this case, renovations and improvements. The homeowner gets fixed interest rates, so they have predictable payments. These loans are solid options for budget-conscious homeowners.

A HELOC is a revolving line of credit that a lender gives to a borrower with a borrowing limit that a homeowner may not exceed. Homeowners may withdraw some or all of their allowed credit during a draw period and will make payments based on a variable interest rate.

HELOC repayments are not fixed because each draw of money from the line of credit adds to the outstanding balance against which interest is applied, and the interest rate charged could also change. In a rising interest rate market, this could be a disadvantage. 

Personal Loans

Homeowners planning to finance smaller home renovations might find that a personal loan is a better option. Personal loans can require no collateral, and interest rates are determined by creditworthiness. The most favorable interest rates will go to those borrowers with the best credit.

Personal loans with fixed interest rates provide homeowners with fixed repayments. Borrowers must also consider that interest rates on personal loans are higher today than in the past two years, and higher interest rates lead to higher monthly payments.

Credit Cards

Financing a home improvement project with a credit card might seem like a wild endeavor, but there are some circumstances where it might be an option. Before funding home renovations with a credit card, homeowners should plan how to repay the debt.

Many credit cards have no-interest introductory rates and highly lucrative points rewards. Still, homeowners assume some risk by using credit cards to finance a home renovation. With a 0% annual percentage rate (APR) card, you won’t accrue a finance charge until the offer period ends. Once it does, interest will accrue on the next billing cycle, so make a payoff plan accordingly.

Warning

If you put a home renovation expense on a card without a 0% APR offer, you’ll owe interest on that expense on the next billing cycle, which will increase the overall cost of your project.

Government Programs and Grants

The government provides some options for homeowners who have limited equity in their homes. These government programs and grants are based on need and location, but are worth looking into for those who qualify.

Eligibility typically depends on:

• Age
• Income
• Property type
• Location

Title I Property Improvement Loan Program

Title I Property Improvement Loans are loans from private lenders that are backed by the Federal Housing Administration (FHA). They are designed to be used for any renovation or improvement that makes your home more livable. Homeowners cannot use the funds for luxury items like a hot tub or pool.

These loans are secured in good faith by the U.S. government, so interest rates tend to be lower on these loans than on other unsecured home improvement loans.

Important

More information can be found at the HUD.gov website.

203(k) Rehabilitation Mortgage Insurance Program

The 203(k) program allows homeowners to finance up to $35,000 into their current mortgage to take on minor home renovations or improvements. Homeowners might use these loans if they don’t have equity to borrow against and are correcting something found in an inspection, preparing their home for sale, or simply making it more livable.  

If you’re interested in checking your eligibility or applying for these loans, call HUD’s Customer Service Center toll-free at (800) 767-7468 (TTY: (800) 877-8339) for a list of lenders in your state.

Alternative Financing Options

If none of those options seems like a good fit, there are still other options.

Crowdfunding

While it might not seem traditional, websites are popping up all over the internet to allow homeowners to tell their stories and ask for donations to help in completing their repairs. This is called crowdfunding. 

Peer-to-peer lending

Peer-to-peer lending platforms online act as matchmakers between borrowers and lenders. LendingClub, Prosper, Upstart, and Funding Circle are a few examples. Peer-to-peer lending occurs outside financial institutions and makes receiving money much quicker than traditional lending routes.

Community Programs/Grants

Depending on the location of your home, you may be eligible for community programs or grants. Often, grants go to impoverished or low-income families. Still, there are some specific grants available to certain populations, like veterans, seniors, rural residents, or people with disabilities, to name a few.

Because each community has different programs to offer, the best place to start is an internet search to see what options are available within your county. Before signing on any dotted lines, it is always prudent to check with your local government to make sure the program is legitimate.

Considerations and Tips for Financing Home Renovations

Making a solid plan is the first step to any good home renovation. Plans can always change—and likely will—but having a starting point can help you establish a timeline and a budget, which is vital. 

According to a Houzz independent study, 34% of homeowners go over budget when projects run long because of unexpected construction issues, rising costs of services or supplies, or miscalculations. Expecting the unexpected and not using every cent available in first estimations will help save you from unfinished projects or having to cut corners.

Once you have a budget and timeline established, you can decide if you want to use a contractor, DIY, or combine both. You can also narrow down which finance options will suit you.

If you choose to borrow money, this is a great time to get an updated credit report so you know where your credit profile (and score) stand. Knowledge is power—especially when dealing with lenders.

Note

Federal law requires that you can access a free copy of your credit report from each major credit bureau—Equifax, Experian, and TransUnion—every 12 months. You can request your free credit report from annualcreditreport.com. 

What Is the Most Expensive Part of Remodeling a House?

Besides adding to your home, kitchens and bathrooms typically cost the most in supplies and time for a renovation. Kitchens and bathrooms have the most fixtures and appliances. Also, where water is involved, there is the potential for other additional, surprise renovation needs.

How Much Does a Kitchen Remodeling Cost?

On average, a middle-of-the-road, minor kitchen remodeling costs $26,790. Major and/or deluxe kitchen remodelings cost almost $78,000.

What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit?

With a home equity loan, you receive a lump-sum loan with a fixed interest rate and have a fixed repayment schedule over the life of the loan. HELOCs allow you to borrow cash against your home’s equity, as needed, at variable interest rates.

Considering renovations to personalize your home or boost property value? Check out our guide—Owning It: Investing in Your Home—to learn more about how to plan and pay for your project.

The Bottom Line 

Picking your wall colors and tile when considering home renovations are some of the fun decisions, but the most important decision is how you’ll pay for your home renovations.

You deserve to be in a home you love, but establishing a budget and desired timeline early and knowing your credit score and mortgage balance are the best places to start the home renovation process. There are many finance options for homeowners, and choosing the one that is right for you comes down to what you can afford.

Read the original article on Investopedia.