For people who want to renovate their homes, budget constraints are the biggest hurdle.
In 2023, the median amount homeowners spent on renovation projects was $24,000. Unless you've got that kind of cash sitting around, you'll need to think creatively about how to pay for your next project.
Unfortunately, almost 40% of homeowners choose one of the most expensive payment methods: credit cards. Instead of looking for a quick (but costly) way to cover the expense, try these more affordable alternatives instead.
Home equity loan (HEL)
If you know how much your renovation will cost, you might consider a home equity loan. These loans let you convert up to 80% of the equity in your home into a lump-sum loan that you pay back over 30 years.
The main appeal of HEL's is that they have lower APRs than most other financing options, with fixed interest rates. However, taking out a HEL also means you'll have a second mortgage against your home, and you'll have to cover closing costs of around 2% to 6% of the loan amount.
Best for: Borrowers with equity who want the lowest interest rates and fixed monthly payments.
Home equity line of credit (HELOC)
Nearly 80% of homeowners say they went over budget on their last renovation. For many renovation projects, it's difficult to estimate the total cost of permits, labor, changes in scope of work and more. That's why a home equity line of credit can be attractive.
HELOCs give you ongoing access to cash that you draw as needed and pay back over time. Here's an overview of how they work:
- Draw period: A set period of 10 years, typically, where you can draw up to a set limit. You usually make interest-only payments on the amount you've drawn during this period.
- Repayment period: Your monthly payment increases since you’ll be paying back the remaining principal and interest. Draws are not allowed during this period, which is usually 20 years.
The flexibility to make multiple draws is exciting for some homeowners, but the terms on these variable-rate products are highly complex, so you might find it difficult to understand what you're getting into.
Best for: Open-ended renovation projects, and borrowers who can easily afford fluctuating interest rates and monthly payments.
Personal loan
Aside from cash, using a personal loan is the lowest-risk option for covering a home refinance. Why? Because these loans are unsecured, meaning they don't require your house as collateral. So if you fall behind on payments, you won't risk losing your home.
The drawback is that personal loan rates are generally higher than secured loans like HELs and refinancing. But some borrowers prefer paying a higher rate since the APR is fixed and there's no risk of foreclosure.
Best for: No risk of foreclosure and lower APR than credit cards.
Cash-out refinance
If you have equity in your home, a cash-out refinance is another way to get funds for your renovation. With a cash-out refinance, you take out a new, larger home loan to pay off your mortgage and keep the extra cash for expenses like home repairs.
Cash-out refinancing can help you get into a lower interest rate than your current mortgage, but it's not a perfect solution. It increases your debt and, in most cases, your monthly payments, and it usually costs thousands in closing costs. You'll also have to have your home appraised and meet a variety of qualification requirements. For example, most lenders require minimum FICO scores of 620.
For more flexible requirements, consider a government-backed cash out refinance loan, which you might qualify for with FICO scores as low as 580:
- VA cash-out refinance: These loans are available for service members, veterans and surviving spouses, and you can qualify with low or no equity and no down payment.
- FHA cash-out refinance: With an FHA refinance, you might qualify for a below-market interest rate, even with a high debt-to-income ratio and bad credit.
Government-backed loans are also available if you want to buy a fixer-upper and need extra cash to improve the property.
Best for: Borrowers with home equity, particularly those who qualify for government-backed financing.
Government funds for disaster relief
If you live in a declared disaster area and your home was damaged as a result, you might qualify for funds to help you pay for repairs. Check to see if you qualify for a loan or other assistance from the following government sources before you apply for financing:
- FHA assistance: Loans for rebuilding or relocating
- SBA disaster assistance: Loans up to $500,000 to replace or repair property
- FEMA assistance: Funds up to $42,500 (for 2024) for qualifying repairs, even for damage that pre-dates the disaster
What's the best way to pay for home renovations?
Cash may not be the most popular way to pay for home renovations, but it is the best. If you take time to save up the money and pay for renovations without financing, you won't have to worry about interest charges, covering up-front fees or losing your home if you miss payments.
Depending on your circumstances, you might jump-start your renovation fund with one or more of the following:
- Tax refund
- Year-end bonus
- Inheritance or gift funds from family
If cash isn't an option, avoid using a credit card. Instead, take some time to look at the different loan types mentioned above and choose a lower-interest option that best fits your situation.
