There’s a lot to consider when taking on a home improvement project. Decisions around colors, brands and styles—and who will do the work—are crucial. But, regardless of the size of the job, you also have to figure out how you’re going to pay for it all. If you’re thinking of borrowing the money (versus spending cash on hand), there are a variety of financing options to choose from.
People considering home improvement financing tend to have many of the same questions, including:
- How much can I borrow and still keep the payment within my budget?
- How quickly do I need the funds, and how will I use them (all at once or spread out over a period of time)?
- Should I leverage the equity in my home or consider another type of loan where my home is not used as collateral (in other words, do I want a financing option that is secured or unsecured)?
Sound familiar? Asking yourself these questions will help you determine which home improvement financing option may be right for you.
First things first: Make sure you understand the common terms associated with financing—like “secured” and “unsecured” or the difference between a loan and a line of credit. Check out the chart below for a quick overview:
Understand your options
Now that you’ve got the terms figured out, it’s important to understand what financing options are out there. The information below can help you evaluate each one to find the best solution for your specific situation and home improvement project.
- Home Equity Lines of Credit (HELOC) is a loan secured by your home that allows you to borrow against the existing equity in your home, typically providing a low rate option. It is one of the most flexible home improvement lending options available, allowing you to draw funds as you need them and pay them back over an extended period of time. For example, many HELOCs offer a 10-year draw period, followed by a 20-year repayment period. Some lenders also offer rate and term choices on each draw. Plus, the interest you pay on funds used for home improvements may be tax deductible (consult your tax advisor). And remember: there are closing costs associated with a HELOC to factor in your budget.
- What they’re best for: Home improvements or renovations that add long-term value to your home, like a new addition or a new roof. Because HELOCs are a long-term lending solution, they are ideal for unexpected home repairs as well.
“If you are eligible to draw up to $150,000 and you’re funding a $50,000 project, for example, you still have the remaining $100,000 available to use not just today, but over a span of many years for future home improvements and normal home maintenance,” Snider says.
- A cash-out refinance is a loan secured by your home. This option works by refinancing your existing mortgage to a higher loan amount—based on the home’s updated value—then cashing out the difference to pay for your home improvements. Don’t forget: Like a HELOC, there are also closing costs to account for with a cash-out refinance.
With a single new loan, you’ll still have just one monthly mortgage payment to manage. Additionally, if you can refinance with a lower interest rate than you currently have on your existing mortgage, you might be able to secure the extra cash with only a modest increase to your existing monthly payment.
- What they’re best for: Medium-to-large-scale home improvements. Because a cash-out refinance means you’re taking out a new mortgage, you’ll incur closing costs—typically 2-5 percent of the new loan amount—so it might not make sense to refinance in order to pay for a small project.
- Personal loans are typically unsecured and can often be obtained relatively quickly—sometimes the same day. The rate is usually higher because no collateral is required.
- What they’re best for: Small-to-medium-sized projects where you have limited equity in your home, need the funds immediately, have a good idea of the overall size and cost of the project, and want to repay at a fixed rate for a specific term.
- Personal lines of credit can be secured or unsecured (and if secured, your house is not the collateral). “A client could open a secured line of credit and use their investment portfolio as collateral to finance home improvements, for example. It helps them keep their investment plan intact while they still have access to funds to pay for their home improvement project,” says John Snider, home equity product manager with SunTrust Bank.
- What they’re best for: Small-to-large renovations that are planned or unplanned. Lines with higher credit limits for larger projects will likely need to be secured by collateral, while lines for projects on the smaller side (or those that come up suddenly) could be unsecured.
“If you have a broken HVAC in the summer and need the work done immediately, you may go with a shorter-term situation (that’s typically unsecured),” Snider says.
What’s more, when it comes to your home renovation budget, make sure you understand where spending will be most impactful in terms of your home’s value.
Feeling confident in your choice
Depending on the financing option you choose for your project, the actual process—from application, to approval, to funding—can vary. Be sure to talk with your lender and do your research so you know what to expect.
“The borrowing process is all about financial confidence,” Snider says, so that once your financing is up and running, you can tackle your home improvement project (without added money-related stress) and enjoy the upgrades or changes you’ve made to improve the value of your home.