How to finance a home remodel

Does your home need some updating but you don’t quite have enough cash for the project? Or maybe dipping into a savings or retirement fund is not an option right now. Don’t fret. There are several other options out there to fund your remodel. Whether you have a large or small project to tackle, comparing your options for financing will help you make the best decision for you and your home.

Four ways to finance your project

Of course, cash is ideal for a remodel, whether that be savings or other funds. But when that is not an option, there are other options for financing a home project.

Repair/remodel loans

Several banks offer home repair/remodel loans. These are basically the same as a personal loan which you can apply for online. There are lower limits on the amount you can borrow with these types of loans, often only up to $50,000. These types of loans also typically have a higher interest rate than some of the other options we will look at, as well as shorter payment terms.

Start with your current banking institution to see what kind of rates they offer to current customers, but also consider local credit unions, as they often have reasonable rates for these types of loans, as well. These home renovation or personal loans are tied to your credit score, not the value of your home, as other options are; but you can receive the funds as a lump sum right after you are approved. This option is best for small projects that do not require much funding or as a supplement to cash.

Another option for funding a remodel is a home equity loan or line of credit. Either of these options are based on the equity in your home. To calculate equity, take the current market value of your home and subtract the remaining balance on your current mortgage (for example: current market value: $500,000 – $300,000 balance on mortgage = $200,000 in equity). Banks will typically let you borrow an amount up to 80% of the equity, so in this case, up to $160,000.

Home equity loans or lines of credit will likely have a lower interest rate than a personal loan or credit card, but they use your home as collateral, so it is very important to make sure you’ll be able to pay the loan back in full and on time. These options also often have a longer repayment period than a personal loan. One difference between a home equity loan vs. line of credit is that with a loan, you receive the funds all at once, but with a home equity line of credit the funds are disbursed based on an approved construction schedule.

Mortgage refinancing

A mortgage refinance is another option to finance a home remodel project, using a cash-out option. This option is similar to the home equity options and lets you borrow against the equity in your home, up to 80%. When you refinance you may also qualify for a lower interest rate than you currently have, or it may give you the option to change your payment terms to best suit your financial goals. The one downfall of a cash out refinance are the (sometimes) high closing costs, so you will likely need some cash up-front for this option.

Credit

Credit cards are, of course, another option, but not typically recommended unless you are doing a smaller DIY project and just need a supplement to purchase materials. Credit cards often carry the highest interest rates, and most builders or remodelers do not accept credit cards because of the risks and fees involved.

When thinking about a home remodel, make sure you consider all your options to find the best financing option for you. The first step would be to do some research and talk to a home remodeler or handyman based on the scope of work you’re looking to do. They will be able to give you advice on what makes sense for your home and give you an idea of what kind of costs to expect for the project.

When considering the scope, make sure you take into account the potential return on investment and resale value of your home and neighborhood. Also make sure you discuss your goals and needs with a financial advisor and/or mortgage officer to understand which of the above options is right for you. With a little research and work, the home of your dreams can be a reality.

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This article originally appeared in Lakeside News.

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