How To Pay For Home Improvements

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Whether you are preparing to sell your home or you just want a refresh for a new season, a home project is a big undertaking. One of the biggest questions you may ask as you plan any home remodeling project is how to pay for it.

Thinking ahead about financing your home project is essential to avoid added costs and future financial problems. Saving up for a specific project and using those funds is the ideal way to pay for a home upgrade. However, that isn’t always possible, and you may need to apply for financing instead.

Some of your financing options include using a credit card, a personal loan, a home improvement loan or tapping into your existing equity through a HELOC or a HELOAN.

Average cost of a home improvement

Inflation is at one of its highest points in decades, making everything — including home improvements — more expensive. A recent Bankrate survey found that 53 percent of Americans are delaying important financial milestones due to the current economic climate, with 25 percent refraining from undertaking home improvement projects.

According to Houzz, the average homeowner spent $22,000 on renovations in 2022. Keep in mind that while this figure was the national average, every home improvement project can fluctuate greatly based on the size of your home, the type of project, the timing and the location of your home.

Home improvement statistics

7 best ways to finance home improvements

Home improvement projects can be expensive and often require financing. Luckily, several options are available to help you find the best option for your situation.

1. Save

The safest financial option to pay for your home renovation is to save a chunk of money for your project. If you don’t already have a large sum of money saved, this option can mean waiting longer to start your project. But it also means you won’t have to worry about paying back a loan or large credit card bill once you finish your home renovation.

The amount you need to save depends on what type of renovation you’re doing and the project’s scope. If you want to finance the whole project by saving, starting small and taking on less expensive projects might be smart. This will ensure that you don’t get in over your head and wind up spending more than you intended.

Benefits

• No money to have to pay back.
• No accruing interest.
• Your credit score will not be impacted.

Drawbacks

• Saving can take more time or delay the start.
• The project may cost more than expected.
• You may not have time to save if the repair is an emergency.

2. Home improvement loans

Home improvement loans are unsecured personal loans offered by banks, credit unions and a number of online lenders. Because the loans are unsecured, you don’t need to use your house as collateral to qualify. Your interest rate and qualification odds are based largely on your credit score. However, if you do qualify, funding comes quickly. Once you agree to the terms, many lenders deposit money straight into your account in as little as a day.

Home improvement loans typically have shorter repayment timelines, lower loan amounts and fewer fees than home equity loans or HELOCs. For example, most home improvement loans only go up to 12 years maximum, while home equity loans have terms that can span up to 40 years. Home improvement loans also have much lower loan amounts, typically up to $100,000 at most, while home equity loans range up to $750,000. Home improvement loans are typically best for small or midsize projects in your home, such as a bathroom or kitchen makeover.

As unsecured loans, home improvement loans typically have higher rates than secured loan options, especially if you have fair or poor credit. Some lenders also charge fees for application processing, late payments and even prepayments on a remodel loan. However, unlike secured loans, if you fail to make the monthly payments or default on the balance, you won’t risk losing your home or property.

Before applying for a personal loan for home improvement, compare the best home improvement loan lenders for low interest rates, competitive fees, repayment terms that work for you and quick payouts.

Benefits

• Funding is generally fast (within a few days).
• Many lenders charge no or few fees for home improvement loans.
• You don’t run the risk of losing your home if you can’t repay the balance.

Drawbacks

• Lower maximum borrowing amounts.
• Shorter repayment periods than a home equity loan.
• Potentially higher interest rates than other forms of financing.

3. Home equity line of credit (HELOC)

Because a HELOC is a secured loan — backed by your home — you can qualify for lower interest rates than you would with an unsecured personal loan. A HELOC is also revolving credit, which means you can take what you need when you need it (up to your borrowing limit). Because of this flexibility, HELOCs are well-suited for longer, bigger projects.

Despite the lower rates, you’ll have to put your home up as collateral, which means that it could be foreclosed if you don’t make payments on time. This could pose a risk to borrowers with a loss of income or an unexpected situation down the road, so only take out a HELOC if you’re sure the monthly payments are sustainable. Keep in mind that most HELOCs also have variable interest rates, which means your payments can increase depending on market conditions and the actions of the Federal Reserve.

To borrow against your house, you must have at least 15 percent to 20 percent equity in your home. The amount you’ll be eligible to borrow depends on your loan-to-value ratio, or LTV, which consists of your home’s value, the outstanding value on your mortgage and your credit score.

Benefits

• Interest may be tax deductible. The Tax Cuts and Jobs Act allows home equity borrowers to deduct interest paid on home equity products if the product was used for home improvement.
• HELOCs have flexible repayment options for up to 30 years depending on how much you borrow.
• May have lower interest rates than other financing options.

Drawbacks

• HELOCs come with variable interest rates, meaning that your interest rate can change depending on the decisions of the Federal Reserve.
• It can be easy to overspend with a line of credit.
• You risk foreclosure if you can’t repay your loan or default on the balance.

4. Home equity loan

If you want to tap into your existing equity but don’t need revolving credit, you could apply for a home equity loan, which is sometimes referred to as a second mortgage. This loan is paid out in a lump sum that you can repay over a number of years in regular fixed monthly payments.

Home equity loans have much higher borrowing limits and repayment periods than other forms of borrowing, like home improvement loans. However, they are secured, meaning you must put your home up as collateral to get approved.

Home equity loans have fixed interest rates because they function similarly to traditional personal loans. This means the rate you’re approved for won’t change from origination to the day you pay the balance off, unlike HELOCS, which have variable rates.

Home equity loans are best suited for medium to large projects due to the repayment structure and average terms. That being said, it’s important that you know exactly how much you need to borrow before applying, down to the cent. Otherwise, you’ll pay interest on money you don’t need.

Benefits

• Fixed interest rates ensure your monthly payment will never change.
• Loan interest is tax deductible if you use the funds for home improvement.
• Over-spending is more difficult than if you were to get a HELOC.

Drawbacks

• You must have a good credit score to qualify for the best rates.
• If your property value declines, you could go upside down on your mortgage.
• You risk losing your home if you default on the loan.

5. Cash-out refinance

A cash-out refinance replaces your current mortgage with a new, larger loan and gives you a new interest rate. Because you get to pocket the difference between your old mortgage and the new loan, you could use the extra dollars from a cash-out refinance to make home improvements.

Cash-out refinance is a good option for homeowners who qualify for a better rate than their existing mortgage but can’t afford an additional monthly loan payment. Because this financing method depends on the state of your current mortgage and comes with added costs, a cash-out refinance is best suited for smaller projects and emergency repairs.

If you’re thinking about refinancing, consider the drawbacks — especially the potential costs — carefully. You’ll need to pay for an appraisal, origination fees, taxes and other closing-related costs. Plus, you refinance your mortgage for a shorter term, you’ll be extending the life of your loan, meaning it will take you longer to pay it off. Refinancing is only a good idea if you can secure a shorter loan term and a lower interest rate than what you pay now.

Benefits

• You can lower your monthly mortgage payment by refinancing.
• If you have an adjustable-rate mortgage, you can change it to a fixed-rate loan.
• You could secure a lower interest rate than what you’re currently paying on your mortgage.

Drawbacks

• The amount you owe will increase with a cash-out refinance, putting you deeper in debt.
• You need to have good to excellent credit to qualify for cash-out mortgage refinancing.
• It’s only really worth it if you qualify for both a lower rate and can afford a shorter repayment term.

6. Credit cards

If you’re making minor updates to your home, such as upgrading a bathroom vanity or installing a new closet system, using your credit card might be one of the best home improvement financing options.

Some cards are interest-free for the first few months. For example, if you’re using a 0 percent introductory APR card, you could pay for minor home improvements without paying interest if you pay back the balance by the end of the introductory period. What’s more, many cards also come with generous reward structures, so the more you spend on a renovation, the more cashback you could earn if your credit card offers cash-back perks.

Like all financing options, there are risks associated with using a credit card to finance your home renovations. Some risks are associated with making large home improvement purchases on a credit card. If you’re using a 0 percent card and you can’t pay your balance back before the introductory offer expires, you could face exceptionally high interest rates.

These rates are not only higher than most credit card rates, but also than other loans or financing options. Plus, card interest rates are variable and can shift based on market conditions. This can quickly lead to high-interest debt accrual if you can’t afford to pay off your monthly balance.

If you plan on using a credit card, ensure you already have the money in your account and only use it to expense smaller items or projects. This can help you avoid overspending and accruing high-interest debt.

On the other hand, using a card for improvements can be beneficial in the long run if you know how to maximize your credit card rewards. In this case, you may want to check out cards like the Upgrade Cash Rewards Elite Visa®, a hybrid credit card and personal loan with a competitive cash-back rate.

Benefits

• Many cards offer rewards programs to borrowers that benefit you the more purchases you make on the card.
• You can take out the amount you need as you need it, which can keep you from getting into more debt than necessary.
• 0% APR cards can save you thousands in interest if you pay back the balance within the introductory period.

Drawbacks

• You will have to pay back what you borrow within the billing cycle to avoid paying high interest.
• It is easy to overspend and get in a cycle of debt.
• Multiple credit cards may be difficult to keep up with.

7. Government loans

Government loans are need and location-based, so you must meet the eligibility criteria to get approved and have your intended renovation approved. While getting approved for a government loan may be harder, those who get approved could save on borrowing costs, like interest and insurance.

One type of government loan is a HUD Title I Property Improvement Loan. It lets you borrow up to $25,000 without any home equity. HUD loans can be a good home repair option if you’ve recently purchased your home and need to make upgrades, but this does come with a catch. The loan funds must go toward approved renovations that improve the livability of the home.

Examples of approved renovations include installing an appliance or making structural repairs. Your loan can also cover architectural and engineering costs, building permit fees, appraisal fees and inspection fees. However, these loans do not cover luxury items like swimming pools or outdoor fire pits and can’t be used for previously completed work.

Veterans Affairs also offers cash-out refinance loans, which allow you to refinance a conventional home loan and take out cash on your home’s equity. It’s only offered to individuals who meet the VA cash-out refinance guidelines and must meet the lender’s requirements. For those who qualify, though, this financing method could provide a sense of financial security. If you can’t make payments, the VA loan guarantee is the “insurance” it provides to your lender.

While it does depend on the lender, government loans tend to have lower interest rates and better terms than regular loans because the government insures the lender against potential loss. However, the eligibility requirements are stringent and geared toward specific borrowers.

Benefits

• You are guaranteed to work with a legitimate lender.
• You do not necessarily have to be the homeowner to apply for these loans. The Title I loan allows long-term tenants to apply.
• Some loans are geared toward those with less-than-stellar credit or a thin credit history.

Drawbacks

• You must use the loan money for projects that increase the property’s “livability”, meaning that you cannot use the money for luxury items.
• Each government-issued loan comes with its own eligibility requirements. For the Title I loan, you need a debt-to-income ratio of 45% or less.
• You must meet the specific eligibility requirements to qualify.

Financing for emergency home repairs

In addition to these options, you can take out a homeowners insurance claim.

Homeowners insurance typically comes with a steep deductible of $1,000, on average, which can be a stretch for some. In fact, a 2023 Bankrate survey found that 57 percent of Americans say they wouldn’t be able to cover a $1,000 emergency expense out of pocket. Moreover, insurance claims may take a while to process, and not all emergency repairs are covered.

If you do not have time to wait for an insurance claim to go through, a loan could be your best option. Home improvement loans and credit cards may work best for smaller repairs, but larger repairs may require a home equity loan or HELOC.

Financing for emergencies with bad credit

If you struggle with your credit and are dealing with a home repair emergency, you may be wondering how you’ll be able to access the funds you need. Luckily, some lenders offer loans specifically for those with less-than-stellar credit.

If you’re worried about taking on more debt, looking into a debt consolidation loan may be a good idea to help you pay down your existing debt and simplify your finances. These loans allow you to combine multiple debts into one payment. This option gives you the opportunity to find a loan with lower interest and fixed payments. Plus, some debt consolidation loans accept borrowers across the credit spectrum, including those with bad credit.

The bottom line

Financing a home project takes planning. Homeowners should consider all the options and choose the best financing path for their project and financial situation. When looking into different loan options, talk to multiple lenders to get the best terms and look for offerings that will benefit you most down the road.