Here are your top financing options for tackling home upgrades and what to consider before jumping in
If you’re planning home renovations this season, you’re not alone. Nearly half of homeowners (48%) plan to renovate their homes this year, according to This Old House’ most recent survey. Of those, 61% expected to borrow money to fund their projects.
Whether it’s a kitchen refresh, backyard makeover or a new home office, weighing your financing options can make a big difference in cost, repayments and the risk you plan to take on. We’ll walk you through these popular options and considerations.
1. Home equity line of credit (HELOC)
A HELOC lets you borrow against your home’s equity. Lenders typically let you borrow up to 85% of the value of your home minus what you owe on your mortgage. A HELOC is basically like a credit card with a high limit tied to your home. You can borrow as needed, up to your approved limit, during your draw period, which is generally 5 to 10 years. You typically need at least 15% to 20% equity in your home to qualify.
Because HELOCs offer such flexibility in how much you can borrow and when, it’s a great option for home improvement projects where you don’t know the exact cost. Plus, it works well for phased renovations and ongoing projects, like working room by room.
Pros
- Flexible funding
- Possible interest-only payments during draw period
- Supports table games with live dealers
- Interest rates are typically lower than personal loans or credit cards
Cons
- Many fees attached to loan
- Variable interest rates
- Risk losing your home if you can’t repay your loan
2. Personal loan
Personal loans allow you access to a lump sum, typically $5,000 to $50,000, though some lenders go as high as $100,000. You repay your loan in fixed monthly payments over a term that usually ranges from two to seven years. Most personal loans are unsecured, so you won’t have to put your home or other assets on the line to qualify.
The biggest advantage of using a personal loan for home improvements is speed. Many lenders deposit funds into your account within a few days, with some as quickly as the same day you’re approved. Interest rates typically range from 6% to 36%, with the best rates reserved for those with strong credit, reliable income and a low debt-to-income ratio.
Personal loans are a smart fit when you need quick cash to get a project done, and you know exactly how much the project will cost. And here’s a tip: look for a personal loan that doesn’t have prepayment penalties so you can pay it off early and save on interest without getting hit with extra fees.
Pros
- Fast funding
- No collateral required
- Supports table games with live dealers
- Fixed payments
Cons
- Lower credit means higher rates
- Shorter repayment terms than you may see with other options
3. Home equity loan
A home equity loan offers a lump sum based on the equity in your home, usually up to 80% of your home’s value minus your mortgage balance. You’ll have fixed monthly payments with terms anywhere from five to 30 years, depending on your loan amount.
Like a HELOC, a home equity loan is secured by your home, which typically means lower interest rates than you’d get with a personal loan or credit card. Plus, you have fixed interest rates, and your payments are the same each month.
Home equity loans are great for large, one-time projects. You’ll have stable monthly payments, and if you use the loan for qualifying home improvements, the interest may even be tax-deductible. The downside is that funding can take a few weeks, and you’ll generally need a home appraisal along with paperwork. Plus, like a HELOC, your home is on the line if you can’t make repayments.
Pros
- Fixed interest rates
- Potential tax benefits
- Lump-sum funding
Cons
- Longer processing time
- Closing costs
- Risk of foreclosure
Wrap up
The best financing comes down to how much you need to borrow, how quickly you need it and how comfortable you feel using your home as collateral. From flexible HELOCs to fast personal loans or fixed-rate home equity loans, there is a smart fit for every type of project, as long as you take the time to compare terms, costs, and conditions.
