Improving your home can be about more than just adding to its value. It could also make your living space more comfortable, allowing you to enjoy a better quality of life.
If you don’t have enough money to pay for home improvements in cash, there are different options you can look at for financing the renovations. Common financing options include a personal loan, a home equity loan, a home equity line of credit (HELOC) or a refinance. Here, we’ll review each one and walk through its pros and cons so you can make an informed decision.
Key Takeaways:
- If you need to finance home renovations, you can do so with a loan, HELOC or refinance.
- A loan or HELOC lets you borrow money for home improvements without getting a new mortgage.
- Refinancing your mortgage could let you take cash out of your home, but there are risks you should know about.
Using A Personal Loan For Financing House Renovations
A personal loan lets you borrow money for just about any purpose, so it’s a great option for financing home renovations. Personal loans can be unsecured installment loans that aren’t tied to a specific asset as collateral, but they can also be secured. You simply borrow a preset amount and then repay that sum in however many monthly payments your loan term calls for.
There are benefits and drawbacks of using a personal loan for financing house renovations.
Pros:
- Quick funding is available, with loan proceeds often disbursed in just a few days.
- With a fixed-rate personal loan, monthly payments are predictable.
- A home appraisal is not needed, since you’re not borrowing against home equity.
- If the loan is unsecure, there is a low risk of losing your home if you fall behind on payments (though technically legal action could still indirectly affect assets).
Cons:
- The loan might come with a higher interest rate than a home equity loan, HELOC or refinance.
- It might have an expensive origination fee.
- You could be more limited in the amount you can borrow.
- Your credit score could drop substantially if you fall behind on your payments.
An unsecured personal loan may be your best option if you’re looking to finance a smaller home improvement project and you want to get started quickly. With an unsecured loan, you may be looking at a smaller loan limit than with another financing option, so these loans are usually best for relatively minor renovations. A personal loan also could be a good option if you don’t have a lot of equity in your home yet.
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Using A Home Equity Loan For Financing House Renovations
A home equity loan lets you borrow against the equity you have in your home. It’s similar to a personal loan in that you borrow a lump sum of money and then pay it off in usually fixed monthly payments over time.
There are benefits and drawbacks of using a home equity loan for financing house renovations.
Pros:
- You may get a more competitive interest rate on your loan than with a personal loan. (Though rates are still usually higher than first-lien mortgage rates, and market conditions can narrow the gap.)
- It will generally have fixed, predictable monthly payments.
- You might be able to borrow a larger sum than with a personal loan.
Cons:
- This loan may come with expensive closing costs.
- It typically requires a home appraisal to make sure you have enough equity to qualify.
- Since your loan is secured by your home, falling behind on payments could put you at risk of losing your home to foreclosure.
A home equity loan may be best for a bigger home improvement project that requires you to borrow a large sum of money. It’s also a good option if you’re on a pretty tight budget and want to know exactly what your monthly payments will be.
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Using A HELOC For Financing House Renovations
Just as a home equity loan lets you borrow against the equity you’ve built in your home, so too does a home equity line of credit. Where they differ is that a HELOC does not provide a lump sum of money with fixed monthly payments.
Instead, you get access to a revolving line of credit, which operates much like a credit card. During your HELOC’s draw period, you can borrow up to a certain limit, as specified by the terms of your borrowing agreement. After the draw period, the repayment period begins, and principal plus interest payments are required.
With a HELOC, you don’t have to use up your entire line of credit. For example, if you get a $50,000 HELOC, but your home renovations only end up costing you $40,000, you can leave the remaining $10,000 untouched.
Let’s look at the benefits and drawbacks of using a HELOC for financing house renovations.
Pros:
- You may get a more competitive interest rate than with another loan type.
- You have flexibility in how much you actually borrow.
Cons:
- Since HELOCs generally have variable interest rates, your monthly payments won’t be fixed.
- You may be tempted to tap your HELOC for purposes other than home renovations, thereby adding to your debt.
- It may come with expensive closing costs.
- A HELOC generally requires a home appraisal.
- Falling behind on payments could mean losing your home.
A HELOC may be the best option if you’re taking on a large home improvement project and you’re not sure what the scope or cost will entail in advance.
You can always err on the side of getting a larger line of credit than you think you’ll need, in case your costs come in higher than expected. However, if you’re going to take out a HELOC, make sure there’s wiggle room in your budget for variable monthly payments, since yours may change over time.
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Using A Refinance For Financing House Renovations
With a traditional mortgage refinance, you swap your existing mortgage for a new one with terms that work better for you. If you’re looking to finance house renovations with a mortgage refinance, you’ll need a cash-out refinance, which allows you to borrow more than your remaining mortgage balance.
Here’s how a cash-out refinance might work: Imagine you have a home worth $600,000 with a $300,000 mortgage balance. If you need $50,000 for a house renovation, you could refinance your $300,000 mortgage balance into a new $350,000 loan.
The first $300,000 would pay off your existing mortgage, and the remaining $50,000 would come to you as cash that you can use as you please. However, refinancing also requires you to pay closing costs.
There are benefits and drawbacks of using a cash-out refinance for financing house renovations.
Pros:
- Depending on your current rate, you might get a lower interest rate than another loan type.
- Your monthly payments can be fixed.
- It potentially allows you to make just one monthly debt payment per month.
Cons:
- Your mortgage payments will generally increase, unless you’re able to get a much lower interest rate on your new loan.
- Cash-out refinance rates are typically slightly higher than rate-and-term refinance rates.
- You may be looking at expensive closing costs.
- A refinance generally requires that your home undergo an appraisal.
- Since you’re resetting the clock on your mortgage, it may take longer to pay off your home.
- It might take longer to close on a cash-out refinance than with other borrowing options.
- Falling behind on payments puts you at risk of losing your home.
A cash-out refinance could be a good option for financing house renovations if you’re able to get a lower interest rate on your new mortgage than what you’re currently paying. This might be the case if your credit score has improved since you signed your original mortgage or if borrowing rates are lower across the board.
If you’re fortunate enough to be able to lower your mortgage’s interest rate substantially, your monthly payments with a cash-out refinance may be similar to what you were paying originally. However, in many cases, you’ll be looking at larger monthly payments due to borrowing more.
You’ll also need to consider your timeline when you’re looking at a cash-out refinance. With a personal loan, home equity loan or HELOC, you’ll generally have access to your funds pretty quickly after getting approved. Since a cash-out refinance involves getting a whole new mortgage, there are more steps that need to be taken before your loan can close, like a title search and more thorough underwriting.
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The Bottom Line: House Renovation Financing Options
Whether you ultimately decide to finance your home renovations with a personal loan, a home equity loan, a HELOC or a cash-out refinance, make sure you weigh the pros and cons of each option, and make sure your payments will align with your budget. Falling behind on any loan or HELOC payment can damage your credit score. And if you fall very behind, you risk losing your home completely with all of these options except an unsecured personal loan.
Finally, before you lock in any specific house renovation financing option, shop around for rates from different lenders. A little research could result in a lower interest rate – and a lot of savings.
If you’re interested in exploring financing options that allow you to access your home’s equity to pay for the cost of home renovations, estimate the amount of equity your home holds using the Home Equity Calculator.
Maurie Backman
Maurie Backman has more than a decade of experience covering personal finance topics that include mortgages, loans, retirement, Social Security, and investing. Prior to becoming a full-time writer, she worked in the financial industry as well as in product design and marketing. Maurie holds a bachelor's degree from Binghamton University, where she studied creative writing and finance. She was happy to combine her two areas of study into a career that allows her to educate consumers on a host of financial topics.
