How to Finance a Home Renovation

Points of Interest

When financing a home renovation or rehabilitation, you can use credit cards, take out a rehab loan, use a HELOC, and more. Each home renovation loan has pros and cons to consider.

The home renovation and rehabilitation market are now worth more than $450 billion per year. From funding fixer-uppers to finalizing plans to perfect their dream home, Americans are more willing than ever to take out a renovation loan or renovate using credit cards. When it comes to financing a home renovation, there are now multiple options on the market to help homeowners find their best fit, including numerous types of home rehab loans allowing them to personalize how they spend.

Home renovation loans

Home renovations can help you turn your current house into the one you’ve always wanted, solve persistent problems impacting your quality of life, and address key concerns before you put your home up for sale. Home renovation loans offer a firm financial foundation for this endeavor, making it possible to fund key projects without dipping into retirement or other savings accounts.

While there’s no time limit on obtaining a loan — you can apply for rehab loans immediately after purchasing a new property or decades into homeownership — the amount of money you can borrow depends on multiple factors including the market value of your home, your existing income and your current financial circumstances including any other outstanding loans or credit card debt.

It’s also worth noting that just because you can take out a substantial renovation loan, doesn’t mean you should. Always consider your plan for payback and the potential for unexpected circumstances to derail financial plans before moving ahead with substantial renovations.

Curious about what type of rehab loan you might qualify for? You might find this online home improvement loan calculator interesting.

Types of home renovation loans

1. Personal loans

If you’d prefer not to link your loan with the value of your home, personal loans are a solid option. While the amount offered by your financial institution or a private lender will take into account the value of your home, personal loans borrow against the strength of your finances as a whole, providing the on-hand cash you need to complete key reno projects.

Pros:

• Don’t use your home as collateral

• Straightforward application process

Cons:

• Typical loans range from $1,000 to $50,000, which may not cover your entire renovation project

• May come with costly origination fees

2. Home equity loans

A home equity loan uses the existing value — or equity — which builds up as you pay your mortgage down. For example, if your home’s market value is $400,000 and you have $300,000 left to pay on your mortgage, you have $100,000 worth of equity. Banks will typically let you borrow up to 80% of this value — $80,000 in our example — to fund renovation projects.

Pros:

• Lower interest rates than credit cards or personal loans

• Funds can be used at your discretion

Cons:

• Your home is your collateral — if you default on payments, you could face foreclosure

• Potential fees, including closing costs and early prepayment penalties

3. Home equity line of credit (HELOC)

HELOC solutions also make use of the equity in your home, but unlike a home equity loan, they’re not disbursed as a lump sum. Instead, you’re able to draw funds from this line of credit multiple times, meaning you only need to pay interest on the portion of your HELOC in use. Most HELOCs come with a 10-year draw period and a 20-year repayment period.

Pros:

• Only pay on what you use — smart spending can keep your total costs down

• Some HELOCs come with low intro interest rates for the first 12 months

Cons:

• Variable interest rates can increase total borrowing costs

• Your property is at risk of foreclosure if you can’t make payments

4. Refinance your mortgage

In a typical mortgage refinance, you apply for a new mortgage on your current home at a lower interest rate, saving you money each month and reducing your interest. In a cash-out refinance, you use the equity in your home to apply for a new, larger mortgage that gives you access to a large pool of cash. Just like a HELOC or home equity loan, you can refinance for up to 80% of the equity in your home.

Pros:

• Lower interest rates than personal loans, HELOCs, or home equity loans

• Funds can be used on-demand

Cons:

• Requires home equity

• Comes with closing costs that are 2% to 5% of the total loan amount

6. Credit cards

Credit cards offer an easy route to rehab financing — simply purchase what you need on existing credit accounts rather than applying for new loans or mortgages. This is a great option for smaller projects or if you’ve got a solid repayment plan in mind. It does pose the risk of maxing out your cards and leaving no room for other purchases.

Pros:

• No need to apply for new loans

• Some credit cards offer intro 0% APR offers for 12 to 15 months

Cons:

• Higher interest rates than HELOCs, personal loans, or mortgage refinancing

• Could leave you with no room for other purchases

5. Government loans

One government loan is the FHA 203(k) loan, which lets you borrow both the cost of a fixer-upper and necessary renovations, then separates the renovation funds into an escrow account for paying contractors directly. The FHA Title 1 loan, meanwhile, requires you to own your home for at least 90 days and lets you use funds to make your house more livable or efficient.

Pros:

• Homeowners don’t require equity for government loans

• Lenders are backed by the Federal Housing Authority, making it easier to obtain funding

Cons:

• Funds must be used for home renovation projects only

• FHA 203(k) loans prohibit DIY work

6. Savings

If you’d prefer to pass on loans entirely, use current savings to fund your fixer-upper. This is a great option if you have enough money to fully cover the cost of a renovation already in your bank account, and you’d like to avoid the potential problems that come with putting your home up as collateral or borrowing money from the government.

Pros:

• No application or approval process

• No fees, interest, or closing costs

Cons:

• Could leave you cash-strapped if emergencies arise

• If reno budgets get out of hand, you may still need a loan

You might find this interesting: If you’re not sure how much to spend on your reno, use the 28/36 rule.

The final word

If you’re ready to take on a home renovation, consider a renovation or rehab loan to access cash on-demand and account for potential cost overruns. With multiple options now available — from personal loans to HELOCs, government renovation loans, and even the choice to renovate with credit card spending — finding your best fit means considering how much cash you need, examining interest rates and fees, and assessing potential project pitfalls.