Real Estate 101: Financing Home Renovation Projects of All Sizes

If you’ve bought a home or are thinking about buying one, chances are you’ve spent hours — if not days and weeks — thinking about how you can improve your home, increase the value of your property and personalize your abode in beautiful ways.

You’re not alone. Creating and recreating your living space is one of the greatest joys of homeownership. There’s no denying the pleasure of seeing a remodeling project you’ve been planning on for years finally come to fruition and become part of your home.

On the flipside, homeowners who are thinking about selling their home to upgrade or relocate typically take a more practical approach by renovating things that add the most value of their property — even if it’s not exactly their style. That’s because every property has a price range in which it can sell, and choosing the right improvements can help attract buyers willing to pay the top of your home’s price range.

For many homeowners, the list of possible projects is endless and the ideas they have could fill a hard drive.

But, of course, there’s that money thing holding many of us back from renting a semi-truck and driving off to Home Depot. So let’s look at some ways to finance a few common home improvements.

Start with the premise that cash is king. If you can finance a home renovation project with your savings — without dipping into funds you may need for other things in life — that is the best way to go. You avoid a pile of financing costs and potential problems that can occur when loans aren’t paid off on time.

Paying for Small Projects

The small projects, of course, are the easiest to finance. For many homeowners, the best method is simply saving up.

If you set aside $200 a month during the winter, you’ll be armed with $1,000 dedicated to your project. That could fund small projects such as painting, replacing a door or updating a few bathroom fixtures without zeroing out your checking account.

Many homeowners choose to set aside home improvement money on an ongoing basis so that they’re prepared to cover minor repairs and updates as they come up.

If your project needs to happen now, credit cards are a reasonable choice. They typically have expensive interest rates, but if you can pay your renovation off quickly, it may be worth a little extra spending instead of waiting months to save up and pay cash.

But be careful of payday lenders and others promising big cash quick — they usually carry exorbitant interest rates along with hidden fees and other costs that, for many, add up and damage people’s assets.

Loan Options for Mid-Size and Major Renovation Projects

Cheap home renovations are about as tough to come by as a tree growing money. Simple makeovers of bathrooms and kitchens quickly add up, usually reaching to $10,000 and well beyond.

So financing is key.

If you’re looking into a major renovation or addition to your home, you’ll obviously consider which option makes the most sense for your finances, timing and project.

Few people have enough cash saved up for big makeovers. And credit cards are typically a poor choice because expensive renovations could take months or years to pay off while steep interest rates artificially inflate the overall cost of your renovation.

That leads many homeowners to the bank for unsecured personal loans, home equity loans of a home equity line of credit.

An unsecured personal loan is one way to get lower amounts of money — often under $10,000 — without putting your home on the line as collateral. A home equity loan, meanwhile, allows you to borrow money against the value of your home. The interest rates on such loans are set at a fixed rate, insulating you from rising rates, and they are tax deductible.

Home equity loans are one-time, lump sum loans that also have closing costs. If you’d like to have access to the cash but don’t know how much you need or may have ongoing projects, you might consider a home equity line of credit.

A home equity line of credit (“HELOC”) also uses your house as collateral. But you can withdraw money at any given time — up to a maximum approved amount. The interest is tax deductible, but the interest rates are subject to change.

For those who can get a lower mortgage rate by refinancing, cashing out and getting a mortgage for more money is a potentially-smart option. But, as with any loan, carefully calculate the fees and be sure not to overextend your finances, putting your home at risk for foreclosure.

As always, it’s wise to talk with a financial planner and trusted bank professionals before making major financial commitments. Many contractors offer financing options or referrals, but you must rigorously investigate the fine print of such offers because they sometimes have excessively high fees and interest rates or are otherwise not in your best interest.