How to Pay for Home Renovations

Benjamin Cornell
A stripped down room has home improvement tools and materials scattered throughout it.
Reading Time: 4 minutes

After owning their home for some time, many homeowners choose — or need — to do home improvements or renovations. Whether the home is an investment property, or you are merely wanting some changes, home renovations can be costly. There are different routes for funding your home improvements and the information below is meant to supply homeowners with the different options available.

1. Home Remodel Loans

Home improvement loans are offered by various banks, credit unions, and online lenders. While they have a different title, they are essentially personal loans. It is even possible to qualify for home improvement loans without any equity.

These loans are unsecured, so you do not have to offer your home as collateral in order to obtain the loan. Like most loans, the interest rate, term, and monthly payment are based on your credit score. Since this is an unsecured loan, the interested rates are generally higher than secured loan options since the lender is taking on additional risk — especially if you have bad credit.

These types of loans generally have shorter repayment terms and smaller loan amounts, so home improvement loans are ideal for small to mid-sized home improvements or renovations. These could be projects like remodeling a room, replacing light fixtures, or painting your home.

2. Home Equity Loans

Home equity loans

 — sometimes called a second mortgage — are another option for renovating your home. Like home improvement loans, you can get home equity loans with bad credit.

These types of loans function by using your home as collateral. As you pay your mortgage, you gain equity. If your home appreciates in value, or you have paid off a significant amount of your loan, you can use that money towards your renovation.

Since your home is being used as collateral, it is considered a secured loan, and the loan is considered a low risk for the lender. This generally means that the loan has better rates than what unsecured loans have to offer.

On the flip side, these types of loans are higher risk for the borrower. If you are unable to make the loan payments, you are risking the potential foreclosure of your home.

The type of project that this type of loan is ideal for depends on the amount of equity that you have accumulated, your lender, and the market value of your home, but home equity loans are generally used for larger projects like full home remodels and additions.

3. Home Equity Lines of Credit (HELOC)

Home equity lines of credit (HELOCs)

 are similar to home equity loans, but there are a few key differences. With home equity loans, you are given the loan in one lump sum, but with HELOCs, you are given a revolving credit line that you can use as needed.

HELOCs operate similarly to credit cards. Like home equity loans, you are taking out a loan against the equity that you have built on your home. This makes it a secured loan (generally better terms), but you are also offering your home as a payment guarantee.

HELOCs have variable interest rates, so your payments can fluctuate based on market conditions. There are two parts to HELOCs:

  1. Draw period: During this time, you can withdraw funds, but you are also required to make small loan payments;
  2. Repayment period: During this time, you can no longer make withdrawals, and your payments increase.

If you are planning to do renovations yourself, but you cannot do them all at once, HELOCs could be a good option for you. As long as you are still within your draw period (typically 10 years), you can withdraw money for renovations when you have the time.

4. Government Loans

The government offers specialized loans for homeowners to tackle home improvements and renovations. There are two primary government loans for home improvement:

  1. Section 203(k) Program: If you plan to buy a “fixer-upper” that needs a large number of costly renovations, the U.S. Department of Housing and Urban Development (HUD) created this program to allow consumers to purchase a home — or refinance a mortgage — and include the cost of repairs in the mortgage loan. The loan is an adjustable-rate mortgage (ARM) and the amount you are approved for is based on the projected value of your home once the repairs are done;
  2. HUD Title 1 Property Improvement Loan: HUD created this program to make it easier for light or moderate property renovations. The maximum loan amount is $25,000 for residential properties, and it is a fixed-rate loan. This is a great option for some of the mid-size to larger renovations like additions or adding a pool.

5. Mortgage Refinances

When you refinance your home, you are given new mortgage terms. This could potentially mean lower interest rates if your current rate is higher than the market rates, or if your credit has improved since you first financed your home. This could also mean lower monthly payments. You can take the money you save on your mortgage, and apply that to your home renovations — although this method may take a while.

Additionally, you can take advantage of cash-out refinancing. This type of refinancing allows you to replace your current loan with a new loan that has a higher outstanding balance. You can withdraw the difference between the two mortgages and use the amount towards your home improvements.

It is important to understand that you need to spend money on closing-related costs in order to refinance your home, so be sure to take this into consideration when determining the best method for funding your renovations. Mortgage refinances are a good option for mid-sized renovations like building a deck, or installing a roof.

6. Credit Cards

You can use credit cards to pay for home renovations. There are credit cards that offer cash-back rewards that can make big-ticket items less costly. There are also 0% APR credit cards that create opportunities to avoid paying any interest at all.

The credit card interest rates, and the amount that you can take out will depend on the type of credit card, and your creditworthiness. A lot of credit cards have higher interest rates than other funding options, so you want to be sure to pay your card balance on time. 

Using a credit card to pay for home renovations is good for small improvements such as replacing an appliance, or installing new lighting.

7. Out of Pocket

If you are able to, pay for the home improvements out of pocket. When you pay out of pocket, you avoid finance charges, and you have no project limitations like you could have with loans.

If you are wanting to do renovations, but the projects are wants rather than needs, create a saving plan for the project so that you can pay for it outright. There are a variety of useful money-saving apps that can help facilitate this as well.

The best way to pay for home renovations depends on the project and your financial situation. Be sure to research funding methods thoroughly before deciding on which method to use when paying for home improvements.


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