How can I finance my home renovation projects?

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Are you looking to spruce up your home with a kitchen remodel? Or maybe you want to refresh your decor by swapping out old furniture for modern pieces? Many homeowners become captivated by decor possibilities but forget how they will be able to pay for it all.

There are many ways for you to finance your home renovation project, but different types of projects might have different types of financing that would suit it better. There are six types of home improvement loans: a home equity line of credit (HELOC), a home equity loan, cash-out refinance, personal loans, credit cards, and select federal programs. Different kinds of home improvement loans can be used for the renovation projects in the US.

Home Equity Loan

Kitchen with grey kitchen cabinet
Used with permission of Kira David Design

A home equity loan is a fixed amount that you borrow based on your home equity. Since the loan is secured against your home, home equity loans have low interest rates. Interest for home equity loans are also tax deductible if you’re using it to renovate your home.

Home equity loans are suited for projects that have a large cost upfront, such as a kitchen remodel. However, you can’t get a home equity loan if you don’t have at least 20% home equity. For example, if your home is worth $500,000 and you have a $400,000 mortgage, your home equity is 20%. You won’t be able to borrow any money with a home equity loan in this case.

Home Equity Line of Credit (HELOC)

Home equity loans are great for large projects, but what about smaller renovations? A HELOC is a type of revolving credit that allows you to borrow money at any time up until a certain credit limit. This credit limit is based on your home equity. HELOCs are a great choice for renovation projects that have costs spread out over a period of time, as you will only borrow from your HELOC whenever you need it. For example, room additions might take a few months, and costs might change.

A HELOC means that you can borrow as little or as much as the project actually costs, saving you in interest costs. HELOCs also only require interest payments, making them have low monthly payments. Just like home equity loans, HELOC interest is also tax deductible for home renovation projects. Affordable and flexible, use a HELOC calculator to find out how much you can borrow.

Cash-Out Refinance

White designed living room with firework
Used with permission of Kira David Design

A cash-out refinance is when you increase your mortgage amount to borrow the increased amount. Let’s say that you have a home that is valued at $600,000 with a mortgage of $300,000. You can refinance your mortgage for $400,000, which increases your mortgage by $100,000. You can then withdraw and use the $100,000 towards anything that you’d like.

This lets you borrow money cheaply at low mortgage rates, and interest payments can be used as tax deductions. However, there can be fees for refinancing your mortgage.

Personal Loans

HELOCs, home equity loans, and a refinanced mortgage are all secured against your home. On the other hand, personal loans have no collateral. This means that the interest rate will depend a lot more on your credit score and income, with rates being higher than those you can get from a secured loan.

A personal loan is a good alternative for those who do not have enough equity in their home to borrow from. Personal loan applications are also quick, allowing you fast access to funds.

Credit Cards

Home office with black wall and white table
Used with permission of Kira David Design

Credit cards give you instant access to money, which can be great if you need to pay for something right away. They’re also flexible like a HELOC in the sense that you can borrow and repay at any time.

However, credit cards have very high interest rates, and so they might not be a great choice for long-term financing. Credit cards also have lower limits compared to a secured loan. You might be hard-pressed to fund a $50,000 kitchen remodel from only a credit card!

Which option is best?

Credit cards and personal loans are an option if you need to pay for renovation expenses right away, but they have higher interest rates than secured loans. They are both good options for small renovation projects, while home equity loans and mortgage refinances are better suited for large projects that have a sizable upfront cost.

You could pay initially using a credit card and then switch to a secured loan, or you could get the best of both through a home equity line of credit. Whichever financing route you take, make sure to make a plan and create a budget to help make sure your home renovation project goes smoothly. Thanks to casaplorer.com for consulting.

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