In-Depth Guide on How to Pay for Home Improvements

Whether your home is newly-purchased, or you’ve had it for decades – sometimes it requires a good makeover. From tiny fixes and small replacements to extensive furnishing – you might have trouble figuring out ways to pay the costs.

Luckily, there are a few ways to go about if your finances can’t support your home renovations. To make the process easier for you, we created this in-depth guide that features savvy ways to pay for home renovations.

How Should I Pay for Home Renovations?

Not only is renovating your home a way to give it a fresh look, but it’s also a fantastic opportunity to increase its value. Still, figuring out the financial side of renovating is a complex task. Your bank account savings will have enough cash to cover all home improvement expenses in the ideal scenario. Sadly, waiting until you have enough money to finance home improvements isn’t always possible. 

So, how do you finance a home renovation? Well, that’s where home improvement loans enter the picture. You can choose from several kinds of personal loans that help applicants to finance home renovations. While most customers will apply straight for the home equity loan, it’s vital to know your options.

Some popular choices include:

• Home remodel loans.
• Home equity loans.
• Home equity lines of credit.
• Mortgage refinance.
• Cash-out refinancing.
• Credit cards.
• Government loans.
• Small loans.
• Borrow money from friends and family.

Ways to Finance Home Improvements

There are many ways you can try to finance home renovations. But the first thing you need to do is figure out if the home improvement will increase your property’s value. To do this, you need to perform research on home sales and prices in your area. Additionally, make sure to get professional opinions from contractors and real estate agents. If you’ve concluded that the home improvements will eventually pay for themselves, you can carry on.

Many people tap into the difference between what they owe on their mortgage and their home’s value, also known as home equity. This can be done through a home equity loan options or a home equity line of credit HELOC. Alternatively, you can refinance your current mortgage, use a designated credit card, or borrow a small loan as financing methods for your home makeover.

Home Remodel or Home Repair Loans

Home remodel, or home repair loans can be a suitable choice if you’re going with a minor renovation. For instance, this can be a bathroom makeover, window replacement, or buying new furniture and appliances.

Lots of banks, credit unions, and any online lender like us provide consumers with loans for home improvement purposes. Since these loans aren’t secured, you don’t have to put up your home as collateral. The interest rate and your eligibility depend on your credit score, income source, and bank account standing.

If you’re approved, you’ll likely get your hands on the cash within a day or two. At least that’s what our customers get when applying for online loans with us.

These loans usually have smaller loan amounts, shorter payment terms, and fewer fees than home equity loans and HELOCs. Yet, that isn’t the case when it comes to interest rates, especially for borrowers with a bad credit score. Moreover, the lender will likely make you pay extra for processing your application. The same goes if you’re late on your monthly payment, as well as repayments on home repair loans.

So, make sure to compare several home remodel lenders before you apply. Pay special attention to a lender that offers a low-interest rate, quick payouts, flexible repayment terms, and competitive fees.

Home Equity Lines of Credit (HELOCs)

Home equity line of credit has become a popular choice among Americans that you should consider. HELOCs is a more affordable way for consumers to cover their home improvement and repair costs. With these loans, you secure your home as collateral. Hence, if you apply, you’ll come across lower fees than you would with a personal loan. It’s important to mention that the rate might vary based on market fluctuations.

Moreover, a HELOC comes with revolving credit. Meaning, it works like a secured credit card, and you can take what you want when you need it. How big the loan amount depends on your credit score and the value of your house. In most cases, HELOCs lenders allow loans up to 85% of the equity in your home, minus the mortgage balance.

Note that to be eligible for a HELOC loan in the first place, you need to have enough equity in your home. So, make sure to compare your current mortgage debt and the value of your home. Usually, you need around 15 percent to 20 percent to qualify. To be able to qualify, a credit score of 620 is required. If you want to get a better interest rate, you need at least a 720.

Lastly, do your best to make your payments on time. Since your home is secured as collateral, missing your payments might get it foreclosed.

Home Equity Loans

An alternate version of HELOCs is home equity loans, sometimes known as a second mortgage. Though these two kinds of home improvement loans are both based on home equity, they still work differently. This raises the question – what type of loan is best for home improvements?

Unlike HELOCs, which allow you to borrow and repay as you go, home equity loans operate similarly to personal loans. The loan amount gets paid in a lump sum upfront. So, if you know exactly how much your renovation project will cost you – a home equity loan is a way to pay it. Usually, the loan amount you get is limited to 85 percent of the equity in your home.

The interest rate is fixed, so there’s no need to stress over market fluctuations. Once you lock in the rate, you’ll pay only that amount until the end of your repayment term. The drawback here is that it won’t have the same payment flexibility you would with a HELOC.

We also have to mention that a home equity loan comes with a three-day cancellation rule. Applicants can back out of a signed credit agreement, but only if the collateral is your principal residence. During the three days, no activity related to home equity loans can happen. Since you’re borrowing a home improvement loan, the contractor probably won’t deliver any of the materials or start their work.

Remember that since home equity loans use your home as collateral, it might get foreclosed if you end up behind on repayments.

Mortgage Refinances

Refinancing a mortgage is taking out a new loan to repay your original mortgage loan while getting a new interest rate. If the loan is larger than the original one, borrowers usually get to keep the difference. So, you could always use the extra cash to finance home improvements.

Note that taking refinancing your mortgage is only a good idea if you can get a lower interest rate than the original one. Make sure to also keep in mind that if you don’t refinance the loan for a shorter term, you’re prolonging the life of your mortgage. So, it will take you a longer period to pay it off.

Several drawbacks come with refinancing a mortgage that you must consider. For instance, since you’re resetting your mortgage’s terms, you’ll have to find a way to pay all closing costs. These can include origination fees, taxes, and appraisal. Still, all these fees could be counted into the new loan. Meaning, you won’t have to come up with the cash.

Credit Cards

If you’re making minor renovations to your home but don’t have cash, using a credit card to pay for the improvements is an option. Paying with credit cards is ideal for small projects, like installing a new closet, getting a new entertainment center, or upgrading your bathroom vanity.

Getting a credit card specifically for minor renovation projects would be a great choice since many are interest-free for the first few months and up to a year. Keep in mind that the majority of these cards also come with great cashback rewards. So, the more cash you spend on your home improvement, the more cashback you earn.

Beware, there are several risks when paying for your home renovations with a credit card. After the introductory 0% APR offer ends, most credit companies have high variable interest rates between 15% to 25%. So, suppose you don’t repay the entire amount owned before the next billing cycle. In that case, you will face additional fees due to the extremely high-interest rates.

Please note that defaulting on your credit cards will hurt your credit score. By contrast, making monthly payments on time and utilizing your credit can improve your credit history. So, this step can be both smart and dangerous depending on how you handle it.

Government Loans

Taking out government loans is another suitable choice to consider when you’re financing home improvements. If you apply for a government loan, you could easily save on interest and insurance fees. There are several types of government loans to choose from.

For instance, if you are a veteran, you could select cash-out refinance loans provided by Veterans Affairs. These loans ensure 100 percent of the value of your home. Moreover, Veterans Affairs loans act as ‘insurance’ to your lender if you cannot make the monthly payments on time. Note that VA loans can come with several extra fees.

Alternatively, you could take out a HUD Title 1 Property Improvement Loan. This loan is an excellent choice if you need to renovate some areas of your recently purchased home. You must own the property for at least 90 days before taking out a HUD. With HUD, you can take out up to $25,000 without any equity in your home. If you borrow over $7,500, you must secure the loan with a mortgage. It’s also worth mentioning that there’s no prepayment penalty to cover.

Note that you must use all the loan cash to improve the livability of the home. Meaning some upgrades might not qualify.

Small Loans

If none of the options above worked for you, you should apply for small loans. Small loans are personal loans that can come in several different forms. They’re a great choice if your home renovation entails a minor project, like a small kitchen remodel. Additionally, small loans are available to applicants with a bad credit score or no credit. 

For instance, payday loans are a very popular choice among borrowers. These are short-term personal loans that have high-lending rates and can be found in many different amounts. With payday loans, borrowers get a set lump sum of cash that they have to repay before their next paycheck arrives.

Alternatively, you might want to consider installment loans. With these loans, you get cash upfront and you need to repay it within a certain period, like 12 months. Though the repayment terms might be brief, installment loans come with high interest rates. The APR usually ranges anywhere from a minimum of 5.99% to 155%. Customers can take out loans that range from $500 up to $35,000.

Some other viable small loans for home improvement include car title loans, personal loans, and bad credit loans.

Borrow Money

Another step you can consider is asking friends and family to lend you money for your home renovations. However, if you fail to repay the cash as agreed, this can strain your relationship. So, make sure you will be able to meet the agreement terms before you decide to borrow from the people close to you. Also, be prepared for some rejections as not everyone feels comfortable lending money. That shouldn’t cause issues in your relationship or make you feel bad.

Bottom Line

First of all, before you start your expensive home renovations, make sure that a home improvements project will pay off in the long run. Then, start choosing renovation loans and options for financing the house repairs.

Home remodel loans are a good choice if your renovation includes a small project. Consider using a credit card when it comes to more minor renovations. A HELOC, however, is a more affordable alternative. Still, they require your house to be put up as collateral, which can be dangerous. Home equity loans are a similar choice for home remodeling, but they have less flexible repayment terms. Mortgage refinancing and government loans can also be used to cover home renovation expenses. Lastly, you could also consider small loans. They’re very accessible, open to applicants with a bad credit score, have short repayment terms, and include high interest rates.

No matter which way you choose to finance your renovations, make sure you can repay them as required. Failing to do so can lower your credit score, generate debt, and make you illegible for future loans.