Real Estate

The Ultimate Guide to Home Remodel Financing

June 21, 2021

Looking to fund your plans for a home remodel or improvements? Discover your best options for a home remodel and improvement financing.

Remodeling your home is a wonderful way to enhance its design and increase its resale value. If you have a few renovations in mind, you may be wondering how you’re going to afford them. After all, home improvements can be expensive—the average kitchen remodel costs $23,000. In which case, you may certainly be seeking out some type of loan option.

The good news? You don’t need to finance your home improvements solely with your savings. There are several types of home improvement financing service options you can choose from. By taking advantage of these tools, you can upgrade your home and raise its resale value without breaking the bank.

To learn the best way to finance home improvements, keep reading. We’ll review six of the leading financing options for home improvements below.

Can You Finance a Home Remodel?

These days, it’s easier than ever to finance a home renovation project. You just need to meet your lender’s financing requirements.

Most lenders will have eligibility requirements regarding your:

Credit score
Income
Home value
Home equity
Financing amount

As long as you can qualify for your desired form of funding, you can use it to fund your home improvement project.

Should You Finance a Home Remodel?

Even though you can use financing to pay for your home remodel project, whether or not you should is another question.

If you can afford to pay for your project out of pocket, doing so will save you a ton of money on interest.

However, if your project is too costly for your savings account to handle on its own, financing may be necessary.

How to Finance Home Remodel Projects

If you decide that a home renovation loan is right for you, you can choose from the following options:

1. Home Equity Loan

If you have some equity built up in your home, you can use a home equity loan to fund your renovation project. Here are the main features of a home equity loan for remodel:

Lump-sum payment – Most lenders will let you borrow up to 80% of your home equity with this type of loan. The money you receive will come in the form of a lump sum. Once you receive this money, you can start making monthly payments on your loan until you repay it in full.
Low-interest rate – A home equity loan is technically a second mortgage since it uses your home as collateral. Thanks to this collateral, home equity loans often come with lower interest rates than you’d find with other forms of financing, such as personal loans or credit cards.
Fixed monthly payments – Home equity loans have fixed interest rates. As a result, your monthly fixed-rate payments will be easy to factor into your budget.
Long loan terms – Home equity loans come with loan terms of five to 30 years. In turn, they give you plenty of time to pay them back.

Since home equity loans give you a sum of money all at once, they’re well-suited for one-time home remodel projects that you can calculate the total cost of ahead of time.

As an added bonus, home equity loans are often tax-deductible when you use them to finance home improvements.

2. Home Equity Line of Credit (HELOC)

A HELOC for home improvement is another form of financing that borrows money from your home equity. It’s similar to a home equity loan, but it works more like a credit card. As with a home equity loan, you’ll need sufficient equity in your home to qualify for a HELOC—usually at least 15-20%.

Here are the most notable features of a HELOC:

Revolving line of credit – Rather than receiving your funds in a lump sum, a HELOC lets you spend money as you need to with a revolving line of credit. You can spend up to your pre-approved HELOC limit, which credit unions determine through your:
- Credit score
- Income
- Home’s value
- Home equity

Your lender reserves the right to change your spending limit at any time. For example, they may reduce your spending limit if your income decreases or your good credit score starts to fall significantly.

Thanks to this revolving line of credit, you can repay your HELOC balance periodically and borrow from it again as needed. In turn, you can avoid racking up a large outstanding balance.

Variable interest rates – HELOCs have variable interest rates, which rise and fall according to market conditions. HELOC rates tend to be higher than home equity loan rates.
Fortunately, you only need to pay interest on your outstanding HELOC balance. In contrast, with a home equity loan, you must pay interest on the entire lump sum, even if you don’t end up spending it all.
Long loan terms – HELOC loan terms range from five to 20 years, so you can use yours for a long time and spread your home renovation costs over many years.

If you have a lengthy, ongoing home renovation planned, a HELOC can offer you the ongoing financing you need to fund your project.

3. Cash-Out Refinancing

Another popular way to finance home improvements is with cash-out refinancing. As with regular mortgage refinancing, cash-out refinancing replaces your existing mortgage with a new one. This new mortgage comes with a brand new set of terms, so you can try to get a lower interest rate or a better loan term.

What sets cash-out refinancing apart is that it replaces your existing mortgage with a new mortgage loan for a larger amount. In turn, you can borrow some cash in the process. After repaying your original mortgage, you can use the extra cash to finance your home remodel.

Cash-out refinancing is a great home remodel financing option if you can switch to a lower interest rate while you’re at it. Before you choose this option, make sure to factor in all of the costs involved in refinancing—you’ll have to pay closing costs on the entire loan amount (not just the cashed-out portion), fees, and taxes.

4. Personal Loan

If you don’t want to use your home as collateral, you can always apply for a personal loan. Personal loans can be used to pay for a plethora of personal expenses, including home renovations.

Here are the most important features of a personal loan:

Optional collateral – Most personal loans are unsecured, which means they don’t require any collateral. In turn, you won’t need to worry about losing your home if you fall behind on payments on an unsecured personal loan.
Fixed interest rates – Personal loans usually have fixed interest rates. To make up for the lack of collateral, personal loan lenders often charge higher interest rates than you’d receive with a home equity loan or HELOC. However, these rates are still lower than most credit cards.
Short loan terms – Personal loans usually need to be repaid within two to five years. Due to these short loan terms, you may not be able to borrow as much money with a personal loan as you could with another form of financing.
Strict credit score requirements – Since unsecured personal loans aren’t backed by any collateral, lenders often have excellent credit score requirements.
Fast approval process – If your loan application is approved, many lenders will get you your money within one business day. As a result, personal loans are a fast way to finance emergency home repairs.

If your home renovations can be paid for in full with a personal loan, it’s a worthwhile option to consider.

5. Credit Cards

If you’re like most Americans, you already have a few credit cards sitting in your wallet. Depending on the scope of your home remodel project, a credit card may be the only type of financing you need to make it happen.

Credit cards are convenient since they don’t require you to go through the hassle of filling out a loan application. They also enable you to earn rewards on all of the money you spend on your home renovations.

The main downside? Credit cards usually have much higher interest rates than other forms of financing. Luckily, some credit cards offer a 0% APR introductory period for the first six to 24 months. If you use one of these credit cards and repay your entire balance before the introductory period ends, you may be able to finance your home remodel without paying any interest.

6. FHA 203(k) Rehab Loan

If you’re in the market for a fixer-upper, an FHA 203(k) rehab loan may be the perfect form of financing for you. This loan bundles your mortgage loan and a home improvement loan into one (allowing you to pay just one set of closing costs). It also allows you to pay for renovations and repairs over your mortgage’s 30-year term.

Insured by the Federal Housing Administration (FHA), this government-backed loan has several eligibility requirements. For example, you must:

Have a credit report score of 580 or above
Use the loan for your primary residence (investment properties are not eligible)
Make a down payment of at least 3.5% (though requirements vary by credit score)
Take out a loan amount within the approved HUD loan limit for your county
Use the loan for approved renovation projects
Use licensed contractors (who are subject to FHA approval)
Hire a HUD consultant to supervise the renovation process from start to finish

Thanks to the lenient credit score and down payment requirements, this loan may be more accessible than other financing options. It also has lower interest rates than most credit cards and personal loans.

However, some contractors may not be willing to work with you, since this program may require them to go through several FHA inspections and get paid according to a disbursement schedule.

What Type of Loan Is Best for Home Improvements?

Now you know how to finance home improvements using six different tools. Of these options, the right form of financing for you will depend on the following factors:

Your existing amount of home equity
Your credit score
Whether or not you’re buying a fixer-upper
The total cost of your home renovation project
The timeline of your project
How quickly you need the financing

Convert Your Equity to Remodel

If you need a major remodel and you don’t have cash on hand, it can be tempting to use loans and credit cards. But these ultimately add to your debt and your monthly expenses.

As a homeowner, your equity gives you other options.

Whether you want to expand your living space or make necessary repairs, sale-leaseback options are designed to meet your specific needs without the need to move or take out loans. Sale-leaseback solutions can help you claim flexibility while freeing up cash for your home repairs and other financial goals.

Key Takeaways

Remodeling your home can be a great project that potentially increases your home value. However, financing these projects can be stressful. And if you don’t have the funds or the credit score for a loan, don’t worry. Discover your options for home improvement loans with bad credit. Explore all the options available to you and talk to a financial expert before settling on a path forward.

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