The best way to pay for home renovations is with cash savings, which saves you interest and ensures that you’ll complete the project without putting yourself in debt. That said, for do-it-yourself projects and other upgrades that require little upfront investment, credit cards are a reasonable option.
For those who are purchasing a fixer upper, adding the renovation costs to their mortgage may be an option. Otherwise, here are five ways to finance a renovation:
1. Cash
Home improvement projects are an important investment in your property and can enhance livability. But financing these changes can be a challenge, especially for new homeowners.
Using cash is the most economical way to pay for renovations. It also helps ensure you don’t get carried away on impulsive purchases, and it can keep you from depleting your savings or credit reserves.
Another alternative is a personal, unsecured loan, but these loans typically have high interest rates and short repayment terms. They can also put a financial strain on your budget, and may come with prepayment penalties or fees. If you are unable to afford an unsecured loan, a HELOC could be an option that offers lower interest rates and more flexible repayment terms. However, you must make sure the value of your home exceeds the amount you are borrowing against it.
2. Line of Credit
Home improvements come in many sizes, from fixing the toilet to knocking down walls to expand your home’s footprint. But they generally fall into one of two categories: a nice-to-have or a need-to-have. Figure out which category your project falls into before deciding how to pay for it.
If your projects are on the smaller side, you may find financing them with a line of credit or a personal loan to be easier and more straightforward than going through a mortgage process. Just be sure you can cover repayment and avoid going into debt. Personal loans usually carry higher interest rates compared to HELOCs, and the borrowing limits are limited. They also often come with short repayment terms that could strain your budget. The best way to use a line of credit for renovations is as a last resort.
3. Home Equity Loan
The best way to pay for home renovations depends on your goals, budget and timeline. A personal loan, for example, may work if you know exactly how much financing you need and want steady, predictable monthly payments. It’s an unsecured type of financing, which means your house doesn’t serve as collateral and it typically comes with lower interest rates than HELOCs.
You can also consider a mortgage with a built-in renovation loan. This can be helpful if your current home loan is with a lender that offers this option, which usually requires a certain debt-to-income ratio and a fixed rate. It can also help streamline the process, as you go through both your mortgage and your renovation financing at once. However, this method can come with its own set of caveats, so be sure to speak with a knowledgeable team member at Point before proceeding.
4. Credit Card
Home improvement projects can be pricey. For do-it-yourself projects or small upgrades, credit cards can help crewlogout. Credit card companies often offer 0% interest for periods of up to 18 months, which allows you to break down the cost into multiple payments and avoid overwhelming your budget, said Atlanta-area certified financial planner Jovan Johnson. Some cards also offer rewards and other perks.
But you need to be careful with credit cards, because they can carry higher interest rates than other forms of financing. Sousa considered putting her kitchen renovation on a card with a 0% interest rate, but she knew paying off the balance within a year or so wasn’t realistic. Using a credit card for a large purchase can also hurt your credit utilization ratio and affect your score, which is why it’s important to pay off the balance each month.
5. Renovation Loan
A renovation loan offers a one-time lump sum of money to help cover your project. It works like a home equity line of credit (HELOC) but can be a better option for those who prefer a predictable repayment schedule and don’t want to wait years to build up enough equity.
These loans are also a great option for those who are planning to sell their home and need to make upgrades before the market picks up. You can also roll renovation financing into your mortgage through programs like Freddie Mac’s CHOICEReno eXpress loan.
Whatever method you choose, it’s important to plan out your renovation costs in advance. That way you can figure out how much you’ll need to borrow and avoid going into debt.
