Sometimes your home just needs a little update… or maybe a big one. Whether you’ve recently been acquainting yourself with the best home design software and have grand plans of building an extension, or your remodeling ideas are smaller in ambition and contained within the walls that you already have, working out how to finance a home renovation can often be the trickiest part.
If you’re eyeing up the savings in your bank, making sure you have enough to get the job done, and still have some leftover for emergencies, is a must. And if the money that you have won’t deliver the scale of makeover that you’re after, you’ll want to know about the home renovation finance options that could potentially help you out.
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. So 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.
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. 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.
Whether you’re eligible for a loan and the interest rate you’ll pay will depend on your credit score, so getting your credit up to scratch could save you a lot on your repayments over the long run. And even if you have bad credit, there’ll still usually be a lender that is happy to lend to you.
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. 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.
The flipside is you’re paying interest on all the money that you borrow upfront and missing out on the flexibility that a HELOC can provide. And of course, your home is once again at risk if you don’t make payments when you should.
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.
5. A 0% interest credit card
If it’s only small changes that you’re looking to make to your home, 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.