What is the Best Way to Fund a Home Renovation?

We know how difficult choosing the best financing option for home repairs can be and that sometimes you may miss a good option due to the difficulty of analyzing each method. That’s why we have put together a list of the proper ways to finance a home renovation, with the best options being HELOCs, home equity loans, personal loans, government loans, and credit cards.

It’s essential to note that each of these financing methods has a different payment plan and interest rates, not to mention their pros and cons. For instance, options like equity loans offer a lump sum but involve the risk of foreclosure if unable to repay while options like personal loans don’t need your home as collateral but need a good credit score for unlimited loan amounts. In this article, we will discuss these financing options in detail.

Average Cost of Home Renovation & Home Improvement Statistics 

The current cost of home renovation projects ranges from $1,200 to $82,000 while the average cost is said to be $41,000. However, most complex projects and small to mid-sized projects cost a maximum of around $62,000.

Here are some home improvement statistics worth noting:

     - According to Angi’s 2023 annual State of Home Spending Report, U.S. homeowners spent an average of $13,667 across 11.1 projects in 2023, showing a rise in spending levels.

     - According to the JCHS of Harvard University LIRA report, the remodeling spending was $481 billion in 2023 billion and is projected to drop to $450 billion (a 6.5% decrease) by the end of 2024.

Best Ways to Fund a Home Renovation Project

Here are several ways you could finance your project.

1. Use Equity Loans: Home Equity Loans and HELOC

Home Equity Loans

Mostly referred to as the second mortgage, home equity loans allow you to borrow up to approximately 90% of the value of your home without counting what you owe and without the need for a revolving line of credit. The loans are lump sums given out all at once, and you repay them over a specified period (often 30 or fewer years).

Pros	Cons
Fixed interest rates. Lower interest. Tax-deductible loan interest if the funds are used for home improvement. A structured repayment plan.	Risk losing your home if you default. Needs an excellent credit score to get good rates. A decline in your property value could lead to an upside-down mortgage.

Home Equity Line of Credit (HELOC)

HELOC is usually a secured loan and a revolving credit offering lower interest rates, which allows you to draw money (up to your borrowing limit) as needed during renovations. The minimum payments are only for the amount borrowed. The amounts for HELOC can be up to 80%-85% of your current property’s value, excluding your mortgage balance. If you choose HELOC as your funding option, you’ll have ten years to use the funds given to you and 20 years after that to repay the balance.

Pros	Cons
Tax-deductible interests. Flexible repayment options. Interest-only payments.	Variable interest rates. Increased payments based on the actions of the Federal Reserve and market conditions. Risk losing your home if you don’t pay. Needs at least 15% to 20% equity in your home to qualify.

2. Personal Loans

This option is mostly referred to as “home improvement loans” offered by banks, online lenders, and credit unions. They are unsecured loans that don’t rely on your home equity but rather your credit score. The better your credit, the easier it is to qualify for a personal loan and the lower the interest rate you’ll have to pay.

Pros	Cons
Zero fees for loan processing. Helps build credit scores. Streamlines your finances through debt consolidation.	Higher interest rates (6% to 36%) and monthly payments. Shorter repayment periods (2 to 7 years). Lower loan amounts (normally up to $100,000).

3. Government Loans

These loans are only issued to individuals who meet the eligibility criteria, which depend on age, location, income, and property type. The government offers a HUD Title 1 property improvement loan where you can borrow up to $25,000, excluding home equity, with repayment timelines of up to 20 years. If you need a Title 1 loan of more than $7,500, you must put your home as collateral. 

Pros	Cons
Less stringent credit score requirements. Potential tax benefits if the loan is used to improve a home. Higher borrowing limits are ideal for larger projects. Saves on the cost of acquiring building permits and inspection permits.	Higher interest rates. Long qualification process. Risk of losing your property. Inspection and approval delays leading to delayed completion of projects. Project restrictions (the funds are only meant for approved renovation projects that enhance home livability).

4. Credit Cards

Credit cards are a funding option for individuals with small home improvements like the installation of new kitchen cabinets. For instance, you can use credit cards with zero interest for the first few months like the 0% APR credit card which offers an interest-free period of 15-18 months. Thus, you can use this period to pay off the loan without paying any interest. Please note that to qualify for these credit cards, you need a good credit score of 690 plus.

Pros	Cons
Allows you to draw upon it whenever you need the money. Most cards offer cash-back perks to borrowers.	You can only avoid high interest if you pay the loan within the given billing cycle. Keeping up with more than one credit card can be tricky.

Bottom Line

Consider using a financing option if you don’t have $60,000+ sitting around or enough money to cater for your remodeling project. Before choosing either of the options discussed in this article, consult with multiple lenders and research to figure out which financing option is best for your project. 

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