Financing for Home Improvement: 7 Smart Funding Tips

Financing for home improvement projects can seem like an overwhelming task to take on without much hope for assistance. The good news is that there are many funding options out there that can help you do a variety of projects, whether you’re doing them by choice or necessity. 

RenoFi’s website offers numerous resources that can help you make the best decisions for your home improvement journey while causing the least damage to your financial health. If you are looking for help with a home improvement financing, the Renofi Marketplace offers many loans through lending partners to help you find lenders for your property.

Here are some smart funding tips for deciding on financing for your next home improvement or renovation project. 

1. Start By Setting a Realistic Budget

Before you start on any projects at home, it’s best to set a realistic budget. To do this, you need to assess your needs and prioritize your essential home improvement projects. You can then start getting quotes from different contractors so you can gain a better understanding of the potential costs involved in your projects.

2. Explore Your Financing Options

Personal loans, savings, home equity loans, and cash-out refinances are just a few of the financing options you have available.  Unsecured personal loans are best for smaller renovations and can be a quick and easy-to-access solution. However, if you need to fund larger renovations, home equity loans, HELOCs, or cash-out refinancing may make more financial sense. 

Let’s review some financing options. 

• RenoFi Loans: This option offers unique advantages tailored to homeowners looking to improve their properties. You will have access to higher loan amounts, flexibility, competitive rates, and less risk of overextending during your financial planning. 
• Savings: This option leaves you with no additional debt, no interest, and less chance of overspending, but it may also come with longer timelines and less available cash.
• Home Improvement Loans: These can provide funding within days in many cases and often come with little additional fees. However, you may have potentially high interest rates, shorter-term loans, and higher monthly payments.
• HELOCS: These are secured by your home as collateral. The interest may be tax deductible, and the interest rates are potentially lower. However, you risk foreclosure if you default on the payments, and if there is a variable interest rate, it may increase over time depending on market conditions.
• Home Equity Loan: These often come with fixed interest rates and more predictable monthly payments. However, you might need a higher credit score.
• Cash-Out Refinancing: With a cash-out refinance, homeowners can utilize their equity and potentially see a lower interest rate than what they currently have. However, it may extend the original loan term and might come with higher monthly payments. 
• Credit Cards: Many credit cards offer rewards and perks, but they often have higher interest rates and can put homeowners into more debt. 
• Government Loans: If you can work with a government-approved lender, you can find the funds you need to make your home more liveable, even with less-than-perfect credit. However, there are often stricter requirements and limited loan amounts. 

3. Research Grants and Assistance Programs

Some local and state programs offer grants or low-interest loans for home improvements. Some nonprofits also provide financial assistance for home repairs, especially for lower-income homeowners. 

The Department of Housing and Urban Development, for example, offers Title 1 loans. These government-issued loans are ideal for home updates that improve energy efficiency. 

4. Prioritize Energy-Efficient Upgrades

When you prioritize energy-efficient home upgrades, like new windows or an HVAC system, you may qualify for tax credits or rebates from utility companies. 

5. Plan for Future Expenses

You want to consider financing options that allow for adjustments based on the progress of your project. It also doesn’t hurt to set aside funds for emergencies or unexpected costs that can arise during your renovations. 

6. Research Lenders

When researching lenders, compare rates and terms and read reviews to gather important feedback that will help you make your decision. 

7. Stay Organized

Document everything you can. This means keeping detailed records of all quotes, contracts, and communications you have had with contractors and lenders. This helps you maintain your budget and monitor your spending. 

Compare Financing Options

When it comes down to comparing your financial options for home improvements and renovations, you want to take a systematic approach. Here are some steps to help you make a more informed comparison before choosing funding.

1. Identify Your Needs: Determine the total cost of your improvement projects and how much funding you need. Outline your renovations and make a plan.
2. Understand the Different Loan Types: Explore the loan options we have discussed in more detail to get a clear idea of what you are signing up for. 
3. Compare Interest Rates: Look at rates from multiple lenders and determine if you prefer a fixed rate for more predictable payments or a variable rate that can start lower but potentially get higher.
4. Evaluate Fees and Costs: Calculate the costs of fees and if there are penalties for paying the loan early.
5. Assess Eligibility Requirements: Check for credit score and DTI requirements. Lenders will review your income and history to ensure you can make payments.
6. Consider Accessibility and Flexibility: Ensure there are no restrictions on how the funds can be used and that the loan type you choose aligns with your goals.
7. Adding a Co-Signer: If your credit isn’t the best and you need to add a co-signer, you want to make sure that the lender you choose offers that option. 
8. Loan Terms and Amounts: These are important because they can impact your monthly payments and project suitability. You want to ensure your financing aligns with your budget and project goals and fits your overall financial situation. 

Choosing the Right Loan Option for Your Needs

When determining which loan option is best for you, think about which one will put you in the best financial position overall. RenoFi loans, for example, may be the ideal fit for your situation if you find yourself wanting to complete larger renovation projects to increase your home’s value. 

Let’s walk through a couple simple examples to show how you can borrow more with RenoFi loans. Imagine you want to spend $150,000 to renovate your new home and increase the value of your home by $150,000:

Scenario 1 (New Home Purchase): 

• Home price: $600,000
• Downpayment (20%): $120,000
• Current Mortgage Amount: $480,000

Example Home Equity Loan Amount: 

• $600,000 * 80% = $480,000 (80% of Total Home Value)
• $480,000 - $480,000 (Current Mortgage Balance) = $0 (Home Equity Loan Amount)

Example RenoFi Home Equity Loan Amount:

• Assuming that your renovation project will add $150,000 to your home value

• After Renovation Value of Your Home: $750,000

• RenoFi Loan Amount: 

  • $750,000 * 90% = $675,000 (90% of Total Home Value)
  • $675,000 - $480,000 = $195,000 (RenoFi Home Equity Loan Amount)

Using a RenoFi Home Equity Loan you have increased your loan amount from $0 to $195,000. Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $195,000 because the RenoFi loan is written against your ARV (After Renovation Value).

Without RenoFi loans, you would not have been able to borrow the $150,000 needed to add the renovations that would increase the value of your home by $150,000. Now, with RenoFi loans, you are now able to get the loan you need to add the renovations you want to your home.

Scenario 2 (Recent Home Purchase): Assuming that you have now paid 10% of your mortgage:

• Home price: $600,000
• Current Mortgage Amount: $420,000

Example Home Equity Loan Amount: 

• Example Home Equity Loan % of Home Price: 80%

• Example Home Equity Loan Amount: 

  • $600,000 * 80% = $480,000 (80% of Total Home Value)
  • $480,000 - $420,000 (Current Mortgage Balance) = $60,000 (Home Equity Loan Amount)

Example RenoFi Home Equity Loan Amount:

• Assuming that your renovation project will add $150,000 to your home value

• After Renovation Value of Your Home: $750,000

• RenoFi Loan Amount: 

  • $750,000 * 90% = $675,000 (90% of Total Home Value)
  • $675,000 - $420,000 = $255,000 (RenoFi Home Equity Loan Amount)

Using a RenoFi Home Equity Loan you have increased your loan amount from $60,000 to $255,000 (4.25x more). Not only are you now able to borrow the $150,000 you wanted to renovate your home, but you can now borrow up to $255,000 because the RenoFi loan is written against your ARV (After Renovation Value). 

Here’s a summary of the difference between traditional and RenoFi home loans in table form: 

In addition to letting you borrow more money for your home renovations, RenoFi loans also offer:

• No draw periods
• No inspections
• No need to give up your original loan
• Higher borrowing limits

RenoFi loans are funded on the day the loan is closed and that is it. Take out the $195k and you get $195k in your bank and you have 20 years to pay off in equal monthly payments with interest and principal, just like a standard mortgage.

Conclusion

There’s no better time than now to start gathering information about the various types of funding that may be available to you for home improvement projects. RenoFi loans are the smartest way to finance a home renovation project. 

Here’s why more people are turning to RenoFi:

• Increased Borrowing Power: Traditional loans often limit you to borrowing up to 80% of your current home value. Alternatively, RenoFi allows you to borrow up to 125% of your home’s current value or 90% of its future value, whichever is lower. This means more money for your renovation project without the need to refinance.
• No Need to Refinance: With RenoFi loans, you can keep your existing mortgage and its low rate intact while accessing funds for your renovation. This is a huge benefit if you’re locked into a favorable rate and don’t want to refinance.
• Streamlined Process: Unlike other loans, RenoFi loans don’t require complicated draw schedules and inspections. This makes it easier to start and complete your project on time.

Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage. 

Explore your RenoFi loan options here.