Whether you need to expand your living space, update the kitchen or renovate the bathroom, the costs can quickly add up. To avoid over-improving your home, you must build a realistic remodeling budget before you begin work.
Typically, only home improvements that will provide a high return at resale are worth the expense of financing them. Here are a few popular options for remodeling financing:
Home Equity Loan or Line of Credit
Home equity is the financial stake homeowners have built in their properties over time, and tapping into it can be a cost-effective way to finance your remodel. However, it’s important to understand the difference between home equity loans and HELOCs, as well as how these differ from other forms of credit, to make the best financing decision for your situation.
A home equity loan is a lump sum of money you borrow against your property’s equity, which you pay back over a set period, typically at a fixed interest rate. This can provide stability and predictability, especially in an environment where rising interest rates may drive up your mortgage payments.
A HELOC is a revolving credit line secured by your home’s equity, which you can draw against on an as-needed basis for home improvement costs. Like a credit card, you only pay for what you use, but this can lead to overspending unless you have strict spending controls in place.
Cash-Out Refinance
A cash-out refinance lets you use your home equity to pay for remodeling and other expenses. It involves refinancing your mortgage for more than you owe, and then receiving the difference in cash at closing. You can use the funds however you like, although lenders typically recommend that you spend the money on items that increase your home’s value or lower your monthly debt payments.
Unlike a personal loan or credit card, the mortgage is secured by your home, which can put your house at risk if you fail to repay the debt. The mortgage lender may also charge higher interest rates than a personal loan or credit cards.
This type of financing can be used to pay for a wide variety of expenses, including credit card debt consolidation and home improvement projects. According to mortgage data, cash-out refinances are more common during periods of falling interest rates, such as those from 2013 to 2023.
Government Loans
The financing options you choose will have a significant impact on your project. Consider the immediate costs and long-term implications of each option before committing.
Government loans can be a great option for homeowners who are planning a major home improvement project, as they combine both purchase and renovation costs into a single loan with competitive interest rates. They are also available to veterans and active-duty service members, and they don’t require a down payment or private mortgage insurance.
A cash-out refinance is a good option if you have low mortgage interest rates and are interested in replacing your existing loan with a new, larger one. This type of financing replaces your existing mortgage and pays off your existing debt, leaving you with a lump sum of money to use for your remodel. In some cases, the interest on these loans can be tax-deductible. Consult a licensed tax advisor for more information. Personal unsecured loans are also an option for remodeling projects and can be easier to obtain than other types of financing.