How to finance a home renovation

How to finance a home renovation
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In 2021, people are increasingly opting to renovate or remodel their existing home, instead of trying to find a new one. Making the most of the space you have is essential if you're looking to undertake a home revamp, but knowing how to actually pay for your renovation is absolutely the first thing to consider. This means not only how to cost up the work and finance it, but how to plan for additional costs and surprise work that inevitably forms part of a remodeling of a home.

We recommend starting your journey with a look at the best home design software, to plan out the extent of your renovation and to get a clear picture of how you want things, and roughly how much work this may involve. Following that, you need to work out a budget by getting quotes for each piece of work needed, and then you need to allocate additional funds for emergency work and unexpected issues (these always pop up). After that, when you have a rough total, it's time to work out how to finance the remodel - be it through your own savings, or by borrowing money.

Is using finance for home renovation a good idea?

Whether you should use finance to pay for your home improvements will usually depend on the current state of your finances and scale of the remodel you have in mind. In an ideal world, you will have saved up for your renovation, and have a pot of money that can be used solely for the purpose of delivering your project. Of course, the reality for most is likely to be very different, with unexpected expenses and significant projects making the use of finance in one form or another almost inevitable.    

First, you’ll need to work out whether your idea is realistic given your circumstances. You’ll need to consider the overall cost of the works – according to Remodeling, kitchen renovations can cost in excess of $26,000, and if you’re considering a full master suite extension, you can expect to pay more than $150,000 – and then you’ll need to think realistically about whether or not you can afford it. Do your household finances allow you to commit to making a further monthly payment if that’s what’s needed? Think about how secure you are in your job, whether any other expenses are on the horizon, and perhaps if there are any areas of your spending that can be pared back to help fund your project - the best personal finance software is perfect for helping to figure all of this out. 

How to finance a home renovation

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If you’re comfortable that you can meet the expense, the second step is to think about whether your plans actually make sense. So will your renovations add enough value to your home to counter what you spend? And will the time and effort you put into remodeling your home be worth it in the long run? Making firm plans is a must, and something that interior design software can help you to achieve if you’re making changes inside, and landscape design software can help with if you’re improving outdoors. 

If your proposed works are extensive, you may also want to think carefully if it is cheaper to renovate your house or move, with the latter being an increasingly appealing option in the post-pandemic landscape. Of course, relocating won’t be a consideration for some, and others will readily spend whatever it takes to achieve their dream home, and find value in the new space they have rather than their property price. Whichever side of the fence you fall, these are all things that should be considered before you start to arrange finance for home renovation. 

How to finance a home renovation

If you’re happy that your home renovation is a viable idea, and that your finances can handle the expense that comes with it, there are a number of home renovation finance options that can potentially help you out. 

1. Home improvement loans

If you don’t want to put your home up as collateral to raise the funds that you need, a home improvement loan is the obvious choice. These unsecured personal loans can be arranged through banks or credit unions, or you can simply search for the best personal loans online

How much you can borrow will depend on the provider, but loan amounts of anywhere between $1,000 and $100,000 are generally available. The money can often be in your account within a day, and you’ll have the certainty of knowing precisely what your monthly payments are and how long you’ll be paying the loan back for. 

How to finance a home renovation

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2. Home equity lines of credit (HELOCs)

If you have equity built up in your home, home equity lines of credit - or HELOCs, for short - are another popular way to finance home improvements. With a HELOC, a pool of funds is made available from which you can draw money as and when you need - this facility makes HELOCs ideal for projects that are difficult to put an exact price to at the start. You’ll only pay interest on what you borrow, and as this is secured against your property, rates are often lower with HELOCs than on personal loans. 

On the other hand, many HELOC rates are variable, meaning what you pay could rise if interest rates start to go the wrong way, and you also run the risk of losing your home should you fail to keep up with the payments that must be made. As you’ll need to have a good chunk of equity in place to be considered for a HELOC, making sure your outstanding mortgage is much lower than what your home is worth is also a must. 

3. Home equity loans

If you've got a fairly good idea how much your renovations will cost, and like the security of knowing what your payments will be, a home equity loan may be right for you. Home equity loans are similar to HELOCs in that you’re tapping into the value stored in your home - the major difference is that you’re taking out a lump sum all in one go, with the value of the loan you’re eligible for dependent on the amount of equity you’ve built up in your property. On the plus side, your payments will be fixed, and so don’t have the potential to rise as they do with a HELOC; when loading up your tax software, it’s worth remembering that the interest payable on a home equity loan used for home renovations is tax-deductible too. 

4. Refinance your mortgage

Low interest rates are helping to make a refinance mortgage a real viable home renovation funding option right now. Replacing your existing mortgage isn’t a decision to be entered into lightly, but for costlier projects, it’s definitely worth approaching the best refinance mortgage companies, particularly if you’ve not refinanced in the past year or so. If you qualify for a much lower interest rate than what you’re paying now, you might even be able to secure the additional loan you’re looking for without seeing too much of a rise in your monthly payments. 

Importantly, you’ll need to take into account all the additional fees that come with refinancing your mortgage, and think carefully if borrowing more means you’ll have to extend the length of your mortgage. 

How to finance a home renovation

(Image credit: Getty)

5. A 0% interest credit card

If it’s only small changes that you’re looking to make to your home, or you’re at the final stages of a remodel and simply need to fund the finishing touches, a credit card might be the best way of securing the funding that you need. With a 0% interest credit card, for instance, you could potentially pay for whatever you need using your card, and avoid paying any interest if you can clear the balance before the interest-free period comes to an end - at the moment, some cards offer 0% terms as long as 18 months. Alternatively, reward credit cards can give decent amounts of cashback or loyalty points if you spend heavily on them.  

The risk with 0% credit cards comes when you fail to pay back what you owe before your grace period expires and high interest rates start to kick in. And if you use an existing card to pay for your spending, on which any introductory period has already expired, remember that you’ll only have the one month to pay it all back before interest starts to build.  

6. Government programs

Before starting out on any renovation, it’s also worth checking whether the Government has a home improvement finance option that could help. A number of options are available, and you’ll always need to ensure you meet the criteria for the various assistance schemes that are provided. 

So if you’ve just bought a home, and don’t yet have any equity to call on as a result, a HUD Title 1 Property Improvement Loan might be able to provide the funding you need to make your property more liveable. For full details of this and other schemes, including the Section 504 Home Repair program and community-based programs, the HUD website is a good place to start. 

Will my credit score come into it?

Any one of the above options could provide the ideal funding solution to turn your home renovation dreams into a reality, but before you take the plunge, it’s important to consider your long-term financial status, with your credit score likely impacting your ability to be accepted for finance – particularly if you’re seeking an unsecured form of credit, such as a personal loan or credit card. In this case, whether or not you’re eligible and the interest rate you’ll pay will depend heavily on your credit score, so getting it up to scratch – either by working to fix it yourself, or by investing in the best credit repair services – could save you a lot on your repayments over the long run. 

However, even if you have bad credit, there’ll still usually be a lender that is happy to oblige. The caveat to this is that the rates will usually be higher and the terms less favorable, but if you’re itching to get started on your home renovation project, there’ll be the options to suit.

Yet if you’re considering using your home as collateral, you may even find that your credit score won’t be such an issue. Given that lenders already have their security in the form of your home, they’re less concerned about your credit history, so opting for a HELOC or home equity loan could be a more viable option for those worried about a potted credit history. That said, it’s still vital to make sure that you’re on a firm financial footing and can keep up with any credit agreement you sign, so looking to improve your financial footprint ahead of applying would be no bad thing, if only for peace of mind.

Tim Leonard

With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.