Payment Options for Home Improvements The right home renovation project can increase your property value and make your home more livable, whether you're remodeling a bathroom, updating the kitchen, or replacing the roof. However, you might not want to spend all of your savings on a $25,000 home renovation project—or you might not even have enough to cover half of the cost. Fortunately, there are a number of other options for funding your renovation. The advantages and disadvantages of each financing option are listed below.
What are my options for financing a home renovation?
You might be able to finance a home renovation with cash from a savings account, depending on the project. There may be other options if you don't have the financial means to cover the cost. You may be able to pay for your home renovation in a variety of ways, including:- Credit cards are accepted.
- Loans for individuals
- Home equity loans
- Lines of credit secured by your home (HELOC)
- Refinances with a cash-out component
- Loans from the government
- Using a Credit Card
Loans for Individuals
Getting a personal loan as an alternative to using credit cards to pay for home improvements is an option. You can typically get a personal loan with a lower interest rate than you could get on a credit card. Furthermore, personal loans for home improvements are typically quick to obtain and have long terms—up to 12 years in some cases. Furthermore, an online lender can usually make the process more convenient. As with any loan or line of credit, the interest rate is determined by your credit score. And if it's not good (typically a FICO score of 670 or higher), the rate you'll be eligible for could be quite high. Furthermore, because you must repay the loan within a certain timeframe, your monthly payments may be higher than if you used a credit card, which does not require you to repay the balance by a specific date. Interest paid on personal loans, like interest paid on credit cards, is not tax deductible. Some lenders do not charge fees for personal loans, while others do. Prepayment penalties, late payment fees, and origination fees are examples of fees that could eat into your home renovation budget.What is the difference between a home equity loan and a home equity line of credit? (HELOC)
Using a home equity loan or a home equity line of credit (HELOC) to fund a $25,000 home renovation has several advantages. According to Cohn, they often have lower interest rates, making borrowing money for a home improvement project more affordable. A home equity loan gives you a lump sum, fixed payments, and a set repayment term, whereas a HELOC has a variable interest rate and allows you to borrow multiple times. You can usually borrow up to 85 percent of the value of your home with both options, minus the amount you owe on your mortgage. HELOCs typically have a 10-year interest-only period, which Cohn believes may help keep monthly payments low at first. If you've been approved for a HELOC of up to $25,000, you can use it whenever you need it. For instance, you may only need $2,000 to give the contractor as a down payment at first. After that, it's possible you won't need the entire $25,000 after all. If the total cost of the project is $20,000, for example, you won't have to pay anything more—including any interest on the remaining line of credit. Note that the IRS allows you to deduct interest paid on some HELOCs and home equity loans. Because you must have enough equity in your home to qualify for a home equity loan or HELOC, new homeowners who recently purchased a fixer-upper may not be able to use one of these financing options. "You will have to pay fees to secure [a home equity loan], because an appraisal is usually required, among other processing steps and fees," Elizabeth Dodson, co-founder of HomeZada, told The Balance via email. An application fee and closing costs are examples of additional fees. Getting approved may take some time because it's the same process as getting a regular mortgage. "Since [a home equity] loan is secured by your home, if you don't pay it back, a lien can be placed on your home until it's paid off," Dodson explained. Because these options rely on your home as collateral, you risk losing your home if you fall behind on payments or fail to repay the loan.Refinance with Cash-Out
If you need money to pay for renovations, another option is to take advantage of the equity in your home with a cash-out refinance. For instance, suppose you have $150,000 left on your mortgage and want to complete a $25,000 home renovation project. After qualifying for a new $175,000 mortgage (the remaining $150,000 mortgage balance plus the $25,000 renovation amount), you may be able to get a lump-sum payment of $25,000 with a cash-out refinance. In an email interview, Justin Goldman, co-founder and CEO of RenoFi in Philadelphia, said, "It can kill two birds with one stone if you have a high interest rate on your mortgage and can refinance into a much lower rate." Even after closing costs—which typically range from 3% to 5%—it could be a good option if it allows you to get a new interest rate and loan term. While extending your 30-year fixed mortgage loan term may not be ideal, your monthly payments may be lower and more manageable than before. Note that, just like a home equity loan or HELOC, if you don't have much equity in your home, a cash-out refinance may not be enough to cover your renovation costs.A loan from the Government
You may be eligible for a few federal government loan programs to help you finish your home renovation project. Some even have incentive programs for making energy-saving improvements. "These types of projects, as well as the loans that support them, will reduce your energy consumption and, as a result, your bills," Dodson said. One example is the Fannie Mae HomeStyle Energy Mortgage. It includes weatherization (such as insulation, new windows, and upgraded doors), natural disaster preparedness (such as retaining walls or storm-surge barriers), and alternative energy sources (like solar panels). Another option is the Department of Energy's Weatherization Assistance Program for low-income households. In terms of other options, veterans may be eligible for a VA loan. At the same time, members of a federally recognized American Indian tribe or Alaska Natives may be eligible for the Bureau of Indian Affairs' Housing Improvement Program (BIA). Other government loans that you might be eligible for include:- HomeStyle Renovation Mortgage from Fannie Mae
- Property Improvements Loan (Title I)
- Rehab Mortgage Insurance (203(k))
Final Thoughts
A $25,000 home renovation is no small undertaking. Not only is it a significant financial investment, but it is also likely to take a significant amount of time. Consider all of your financing options for home improvements before deciding on the best one for you, depending on your financial situation. Consider the card or loan's interest rate, the time it will take to repay the money borrowed or charged, and whether you can afford the extra fees and steps involved. You may be able to use one or more of these options to pay for your $25,000 home renovation, ranging from cash in your savings account to credit cards, personal loans, or a cash-out refinance.