How To Finance Home Renovations: Compare 8 Home Improvement Options

Making changes to your home can be expensive, and not everyone can afford to make those changes out of pocket. Whether you’re ready to update your ‘80s bathroom or it's time for your home to grow with your family, we have the details on how to finance home renovations to help.

Home improvement loans can help you afford the upfront cost of big updates or repairs that make your home safer, more livable or more enjoyable. However, anytime you consider borrowing money, it’s important to ensure you can afford to take out the loan and that you pick the best loan type for your needs.

1. Home Equity Loans
2. Home Equity Line Of Credit (HELOC)
3. Cash-Out Refinance
4. Personal Loans
5. Cash Savings
6. Contractor Agreements
7. Credit Cards
8. Government Loans

1. Home Equity Loans With Tax Benefits

Home equity loans use your home as collateral for second mortgage approval. Money secured with your home’s equity can be used for any need, including home renovations or repairs.

Homeowners can be approved for up to 90% of their home’s equity, depending on their credit score and the affordability of the additional mortgage payments. As this is a second mortgage payment, your interest rate is likely to be slightly higher than your first mortgage’s rate, but still much more affordable than unsecured personal loans.

This can be a good option for those seeking renovations because you can deduct mortgage interest on a second mortgage if the funds are used for home improvements, so you’ll potentially see additional savings when you file your taxes for the year.

Repayment: Home equity loans offer fixed interest rates and monthly payments.

Requirements:

• Credit score of 680+
• Debt-to-income (DTI) ratio under 45%
• Home equity greater than 15%

2. HELOC Financing For Flexible Borrowing

A home equity line of credit, or HELOC, allows you to borrow money by using your home’s equity as collateral. Your lender will set a borrowing limit and you can take as much money from the line as you need.

You can pay off what you borrowed and borrow again within an agreed-upon time frame known as the draw period (typically 10 years). During the draw period, you only pay interest on the equity you use and you may not be required to pay toward the principal until the draw period ends and repayment begins.

If you’re considering a large renovation and aren’t totally sure how much it will cost, a HELOC might be a good option for you.

For example, if you decide to redo your kitchen, a contractor may quote you an initial estimate of $10,000. As time goes on, you may run into issues with repairs or decide on different paint, cabinetry or other extras for the room. A $10,000 estimate could easily double in this case, and a HELOC’s flexibility allows you to borrow as needed.

Like home equity loans, many HELOCs aren’t tax deductible unless you use them toward projects around the house. If you have any doubts, always contact a tax advisor.

Rocket Mortgage^® doesn’t offer HELOCs at this time.

Repayment: HELOCs charge monthly fixed-interest payments on equity borrowed through the draw period (10 years). Monthly payments for principal and interest begin during the repayment period.

Requirements:

• Credit score of 620+
• DTI ratio under 45%
• Home equity greater than 15%

3. Cash-Out Refinancing For A Lower Mortgage Rate

If your current mortgage interest rate is higher than the average market rate and you have equity in your property, you might want to use a cash-out refinance for your home improvements. This means that you’ll refinance your existing mortgage and convert the equity in your home to cash.

Not only can this adjust your current mortgage to more favorable and affordable terms, but it’ll also give you the money you need to pay for your home improvements without having to take on a separate loan.

If current market rates are higher than your current loan terms, a cash-out refinance might not be the best option for you. Even though you’ll be able to dip into the equity in your property, it would mean paying more interest on your loan balance for the remainder of your term.

If you think a cash-out refinance could be the right choice for you, the next step is to get approved.

Repayment: Monthly payments will continue, replaced with a new mortgage considering your increased principal and updated interest rate.

Requirements:

• Credit score of 620+
• DTI ratio under 40%
• Home equity greater than 20%

4. Personal Home Improvement Loans For Small Projects

A personal loan used for home improvement is typically the most unsecured form of debt because it’s not backed by the collateral of your home.

Like a credit card, your rate will depend on your creditworthiness. Rates on these types of loans are typically fixed. This means your payment won’t change and you’ll be able to easily budget for the payment with your other expenses.

You might want to get a personal loan for your home improvements if:

• You don’t have much equity in your home
• The project is relatively small
• You can pay off the debt within a shorter time frame (3 – 7 years)

A personal loan may not be the right choice for you if your home improvement goals require a large sum of money. Personal loans typically have higher rates and shorter loan terms than a second mortgage or cash-out refinance, so your payments may be less affordable than with other options.

Repayment: Personal loans are repaid with monthly payments and a fixed interest rate for a short loan term (3 – 7 years).

Requirements:

• Credit score requirements vary and impact your annual percentage rate (APR)
• DTI ratio under 35% preferred
• Proof of income 

5. Cash Savings

Saving money to cover your renovations is the most cost-effective way to upgrade your home, but it does take time and a disciplined budget. You can start building a fund with a high-yield savings account (HYSA)¹ with a bank or credit union.

If you need a large sum of cash for major renovations, consider secure long-term investments in money market funds or preferred stocks. These aren’t risk-free, but if you’re able to invest for 5 or more years, there’s a good chance any downturns will be able to recover your principal investment and then some.

6. Contractor Agreements For Customer Financing

Some contractors may be able to offer financing through a third-party lender to help you renovate while bolstering their own sales. Rates and terms will vary based on the contractor and the third-party lender, but these are often fee-free offers for both contractors and customers.

This offers a few benefits for customers, including:

• Easy financing through your contractor instead of a separate lender
• Project-based financing so you don’t overborrow
• Quicker start date with fewer negotiations and approvals between lenders and contractors

Repayment: These may be repaid with monthly payments or milestone repayment dates depending on your agreement with your contractor.

Requirements: Vary by lenders/contractors

7. Credit Cards For Quick Fixes

Credit cards can come with steep interest rates, but they can be a great option for small home upgrades that you can repay before the interest accumulates – especially if you open a new credit line with 0% APR for the first year. Financing smaller upgrades over time with rewards cards can also help you rack up points and cashback promotions.

While there are benefits to paying with your card, regular credit card interest rates are significantly more expensive than home equity loans, personal loans and other financing options presented so far.

Be sure you have the funds to repay the renovation expenses and consider opening a new card for introductory benefits.

Repayment: Borrowers pay monthly minimum payments with variable interest rates. New credit lines may offer 0% APR or interest-free introductory offers.

Requirements:

• Credit score requirements vary, typically beginning at 580+

8. Government Loans For Low Interest Rates

The U.S. government offers several home improvement loan options for citizens that need the most aid. These offer great interest rates but come with strict requirements for approval.

Government-offered renovation loans include:

• HUD Property Improvement Loan (Title I)
  • Maximum loan: $25,000
  • Must be applied to approved renovations
• 203(k) Rehab Mortgage Insurance
  • Minimum loan: $5,000
  • Total property value must be below the local FHA limit
• Section 184 Indian Home Loan Guarantee
  • Maximum loan varies by county
  • Borrowers must be members of a federally recognized Native American or Alaska Indian tribe
• Veterans Affairs (VA) Cash-Out Refinance Loans
  • Maximum loan: determined by the home’s value and equity
  • Must have a certificate of eligibility

Some of these loans can also cover the cost of purchasing a home or refinancing your mortgage, such as the 203(k) Rehab and Section 184 loans.

There are many more federal loan and grant opportunities that may be available to you, so consult a lender to determine a good fit.

Home Improvement Grants For Remodels

Federal or organizational grants may also be available to select groups to aid in home remodels. For example, the USDA’s Section 504 Home Repair Program offers $10,000 grants and $40,000 loans to very-low-income homeowners and buyers to improve or modernize their homes.

Like the government loans available, these home repair grants typically have strict qualifications for approval. Consult your lender about grant options – especially if you’re a member of any of these groups:

• Low- and very-low-income families
• Senior citizens
• Homeowners with disabilities
• Active military servicemembers and veterans
• Native and indigenous groups of America

Be sure to explore local community-based organizations as well. Many large cities have housing organizations and volunteer groups to provide funding or labor for home renovations, especially if health and safety are a concern.

How To Get Home Improvement Financing

After you’ve determined what type of home improvement loan is best for you, you can begin shopping around for different lenders that offer the type of loan you’re looking for.

The requirements for getting a loan will depend on what type of loan you get and the lender’s individual requirements. For a personal loan, a lender might have specific credit score and debt-to-income ratio limits for borrowers. For a loan that’s tied to your home, such as a cash-out refinance, you may also need an appraisal.

Here are a few strategies to get you started.

Compare Home Improvement Loan Rates

Shopping around and getting rates from multiple lenders is important if you want to get a good rate, because it allows you to compare offers and ensures you get the best deal available. Before choosing the best mortgage lender, be sure you’re comparing rates for comparable loan products, looking at the interest rate and APR the lender offers and considering the type of loan you want.

Here are the main things to compare when you’re choosing a lender:

• Interest rates
• APRs
• Loan estimates
• Prepayment penalties
• Estimated costs to close

Know What Credit Score You’ll Need To Qualify

As with other loan types, the best way to get a good rate on your home improvement loan is to minimize the risk you pose to lenders as a borrower. This means having a good credit score and keeping your overall amount of debt low compared to your income.

Some lenders offer loans to borrowers with less-than-ideal credit, but your options might be more limited and the loan will likely come with a relatively high interest rate.

Look Into Financial Assistance Programs

For many, the upfront costs of refinancing or the monthly payments of a second loan could make qualifying for a home improvement loan challenging.

If you’re struggling to get a home improvement loan but are in need of assistance to upgrade or repair your home, you might want to explore any home improvement grants and programs that are available to you.

Renovation Loan FAQs

There are several options available to finance your home renovations. If you’re still deciding between financing options, below are some additional insights to help you choose.

How Can I Finance a Home Renovation Without Equity?

Home equity loans and HELOCs offer great interest rates, but there are several other ways you can cover your home renovations without equity, including:

• A personal savings and investment strategy
• A personal loan through a bank or credit union
• Credit cards
• Federal home improvement loans
• Customer financing through your contractor
• Home repair grants and assistance

If you’re looking for a great rate, home equity financing and government-backed loans are good options. Personal loans are also relatively affordable.

Homeowners looking to cover relatively small renovations can earn rewards and save with a 0% APR credit card, as long as they can repay the balance before interest accrues.

If you want to avoid interest altogether, saving money the old-fashioned way or exploring your grant eligibility are the most cost-effective options.

Is It a Good Idea To Use Equity for My Remodel?

Taking advantage of your home’s equity is a great way to fund your home’s renovations. Not only do you benefit from lower interest rates than what unsecured loans offer, but you’re directly contributing to your home’s value.

Lenders typically limit home equity loans to 90% of your total equity, and you’ll need between 15% – 20% equity to qualify.

The Bottom Line

Home projects large and small require homeowners to buckle down on their budget and accept that their home is going to be out of sorts for a while. That doesn’t mean the process has to be stressful and knowing how to finance home renovations can help you create a game plan with your lender and contractor.

Whether you’re financing a fixer-upper or refinancing for a lower rate and some spending cash, Quicken Loans^® can help your project come to life.

Sources:

1. Investopedia