Financing Options For Home Improvement Projects

The best financing option depends on the size of the project and the homeowner’s financial situation. Ideally, using cash is the smartest way to cover renovations because it won’t disrupt other financial goals or put homeowners in debt.

However, for those who need to borrow, there are several different loan options available. Some require collateral, such as a home or car, while others don’t, such as personal loans and credit cards.

Home Equity Loan

Homeowners can use their home equity to finance projects like a kitchen remodel or adding an addition to their house. A home equity loan is a great option for homeowners who have a clear idea of what the project will cost, since they receive the funds in one lump sum and start paying back the principal immediately.

This financing option can also help homeowners save on interest rates, which are often lower than those offered on unsecured personal loans. However, it’s important to remember that tapping into your home equity will reduce the amount of money you can borrow against your mortgage when you sell your home, so this shouldn’t be done lightly.

In addition to closing costs, home equity loan borrowers may also be responsible for appraisal fees, title insurance policies, lender and third-party fees, property valuations (including flood determinations), escrow payments and prepaid interest. Navy Federal covers all closing costs on its Fixed-Rate Home Equity Loan applications dated on or after June 1, 2023.

Home Equity Line of Credit (HELOC)

You may be aware that home equity loans and lines of credit can be helpful for financing a variety of expenses. They are secured by your house, and so are more reliable than unsecured debt such as personal loans or credit cards. However, you should be aware that both HELOCs and home equity loans require significant documentation, have longer funding periods, and place your property at risk if you fail to make payments.

Using your home equity line of credit for a renovation project can be beneficial because you can draw from it as needed, paying interest on only the amount you use. You can also choose a lender that offers flexible repayment terms, and you might be able to lock in a fixed interest rate.

However, it can be easy to spend money on non-essential items when you have access to so much credit, and it is important to create a budget that will ensure the costs of your renovation are met in a timely manner. You should also be aware that HELOCs are revocable, like credit card balances, and the interest you pay may be tax deductible, if used for a qualified home improvement expense.

Credit Card

Whether you want to add a new backsplash to your kitchen or replace a worn-out lawnmower, credit cards can be a great tool for financing home improvement projects. With many rewards cards offering a 0% APR period for well over a year, plus generous sign-up bonuses and program rewards, you can often pay off your expenses before interest charges kick in.

If you use a credit card for home improvements, it’s important to make sure you have the discipline to pay off your balance each month to avoid interest charges. Consider setting up reminders or automatic payments to help you stay on track.

If you can’t afford to carry a balance, it might be best to consider other financial tools. Personal loans and savings accounts don’t require a credit check, but they may not be as flexible in terms of repayment or funding. For example, if you need to borrow a large amount of money, you could be limited in your options or even rejected for the loan.

Unsecured Debt

There’s a lot of confusion about what’s known as “home improvement loans.” In some cases, this term is used to market high-interest unsecured personal loans that are geared toward people who want to borrow for renovations. But a home improvement loan is actually a type of mortgage-backed debt that you can use to finance renovations and other costs associated with your property.

The advantage of a home equity loan or HELOC is that you can tap into the equity you’ve built up in your house and get funding to pay for renovations, without having to sell it. However, this type of financing has a lot of fees like loan origination and appraisal fees and requires that you have adequate home equity to qualify.

If you don’t have enough home equity to qualify, a personal loan or a new type of renovation financing called a RenoFi Loan that lets you borrow based on your home’s after-renovation value might be a good option for you. Just be aware that these alternatives typically have higher interest rates than a home equity loan or HELOC.