How to Finance a Home Renovation Without Going Broke
Six options for every budget and patience level.
Published Jan 11, 2022 1:00 AM
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Renovating can be a daunting process, so we asked Jean Brownhill, founder and CEO of Sweeten, a platform that helps people find expert advice and get matched with vetted general contractors, for her best remodeling tips and tricks.
Once you’ve figured out how much your house remodel is going to cost, reality really sets in. Now you’ve got to ascertain how to actually pay for those Shaker kitchen cabinets or new hardwood floors. There is no one right way—it depends on the size of your project, your financial situation, how long you want to be making payments, and whether you already own your home or are in the process of buying it, among other things. Here’s my beginner’s guide to how to finance a home renovation.
What Your Renovation Payment Schedule Will Look Like
Most home renovation projects require a deposit up front, with installments made at specific points. On a smaller project, you might only make two payments, with 50 percent due up front and 50 percent due at completion. For a midsize project like a kitchen renovation, you might agree to pay 15 to 30 percent up front, 40 to 50 percent at the midway point, and the final 15 to 30 percent upon completion. Larger remodels tend to require a smaller deposit up front but more payments along the way.
In general, you can expect to set three to five payment milestones, such as demolition, the midpoint of the renovation, and upon punch-list completion (a punch list details tasks that still need to be addressed, typically after inspection). Negotiate with your general contractor—I recommend finding your perfect match on Sweeten—to establish these terms and get them all in writing!
How to Finance Your Home Renovation
Saving up and paying in cash is your most straightforward option.
The upsides: No debt is the big one. Also some contractors may offer you a discount if you choose to pay in cash, but I suggest checking with your general contractor to make sure everything is aboveboard from a tax perspective.
The downsides: You will need to have all that cash on hand, which can be a challenge, especially with larger contract sizes and quick timelines (saving large amounts of cash can take a while). Additionally, there is no recourse using this method outside of suing, which makes it inherently riskier.
This is another quick form of payment that is relatively easy to execute, assuming you have a large enough line of credit.
The upsides: Paying via credit card comes with some buyer protections (such as insurance against goods being stolen or damaged for a certain amount of time after they’re purchased) and can earn you valuable points or mileage.
The downsides: Credit cards can have very high interest rates, so if you don’t pay it off right away, your renovation could cost you much more than expected.
Personal or Unsecured Loan
If your renovation will cost under $50,000, you might want to consider a personal (or unsecured) loan from a credit union, bank, or other lender. With a good credit score, you can expect to get an interest rate in the range of 5 to 6 percent on a $50,000 loan over 24 months for personal unsecured loans.
The upsides: These loans don’t require collateral, meaning the loan isn’t tied to your home and won’t jeopardize your ownership if you default. They’re also usually fairly easy to acquire.
The downsides: Rates tend to vary quite a bit for personal loans—the ceiling is around 30 percent—so do your research to figure out what makes the most sense for your renovation.
Renovation Loan Bundled With Your Mortgage
If you are currently in the process of purchasing a home, this may be your best bet. Alternatively, if you already own but are considering refinancing, this option can help you adjust your mortgage rate while rolling new financing into it. (This process is known as cash-out refinancing.) As with regular mortgages, you can choose between a conventional loan from a company like Fannie Mae and one backed by the Federal Housing Administration, known as a FHA 203(k) loan.
The upsides: Either way, you go through both the mortgage and renovation financing application process just once and you’ll end up with one monthly payment for both. However, a FHA 203(k) has lower down-payment and credit-score requirements.
The downsides: Mortgages with built-in renovation financing may have additional requirements with regard to timing. FHA loans have a limit to how much you can spend, which might not jibe with big project plans. Perhaps most important, many contractors don’t work with FHA loans, so do your research before going this route.
Home Equity Loan
A home equity loan (HEL), often referred to as a second mortgage, is an option if your house is worth more than what you now owe on your mortgage. You’ll receive a lump sum with a fixed interest rate. You can typically borrow up to 80 percent of the value of your home, depending on how much equity you have.
The upsides: This type of loan is similar to a conventional mortgage in two ways: It offers tax deductions on interest payments and you make payments over a similarly long time frame. Plus the interest rates will almost always be lower than a credit card or personal loan because this debt is secured by the collateral (your home).
The downsides: There may be closing costs, which you should factor into the cost of your renovation. And some lenders charge a penalty for paying off the loan early.
Home Equity Line of Credit (HELOC)
A home equity line of credit is similar to a credit card, in that the lender gives you a credit limit and charges you interest only on the amount you use. You can obtain these types of loans from all the usual sources—banks, finance companies, brokerages, and credit unions.
The upsides: Instead of receiving a lump sum up front, you borrow what you want, when you want. This makes it a good option for a series of projects or if you anticipate having a long renovation.
The downsides: HELOCs have variable interest rates, so payments may go up and then be out of your budget. Also, undisciplined users could decide to make interest-only payments during the period when you can withdraw money, then find themselves paying very sizable amounts afterward.
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