Financing Home Renovations: Everything You Need to Know

Financing home renovations involves several different methods homeowners can use to secure funds for renovating, remodeling, or repairing their homes. Transforming a house into your ideal home can be rewarding, but securing financing for these projects isn’t always straightforward.

Fortunately, numerous options are available for homeowners to help finance renovation projects using savings, home equity loans, or home improvement loans, along with various alternative financing options.

Renovation or home improvement loans offer an easy way to fund upgrades and repairs that can enhance your home’s value. 

Whether you want to make essential repairs or enhance your home’s aesthetic, RenoFi’s financing solutions are designed to help you achieve your renovation goals quickly and efficiently.

Understanding Home Renovation Loans

The term “home renovation loan” broadly covers various types of loans used for funding renovation or rehab projects. It is also commonly known as a home improvement loan.

Home improvement loans can cover a wide range of updates, from major additions like a new room to smaller changes like updating a kitchen. Common uses include installing or upgrading HVAC systems, enhancing energy efficiency, new roofing, and remodeling kitchens or bathrooms. 

These loans provide funds based on the project’s estimated cost and after-renovation value, which are repaid over time with interest and come in two main types: secured loans like home equity loans and unsecured loans like personal loans.

When a Home Renovation Loan Makes Sense

A home renovation loan is ideal for those planning larger projects, such as major upgrades or repairs, who need financial help to cover the costs. It’s especially useful for homeowners looking to increase property value, those with insufficient savings, not enough equity built up, or individuals seeking lower interest rates compared to personal loans or credit cards. 

Renovation loans can also benefit urgent repairs, projects with a high return on investment, or enhancements for long-term enjoyment.

Key Considerations for Financing Renovations

To determine the best financing approach, consider your budget, monthly payment affordability, and whether you should wait for better interest rates. Use the RenoFi monthly payment Calculator to play out different scenarios.  It’s wise to finance home renovations when you have three to six months’ worth of bills saved up and are confident you can handle monthly payments. Ensure you have a stable job, reliable income, and employment history; the property must be your primary residence and meet safety standards. 

To qualify for a renovation loan, you typically need a minimum credit score of 620, though some loans may require a higher score. Additional factors like your debt-to-income ratio and the nature of your renovation project will also affect your eligibility, so finding a lender with experience and competitive rates is crucial.

Planning the Renovation Budget and Financing Options

Thoroughly research contractors and suppliers, set a clear project scope, and account for unexpected costs. Choose a suitable contractor to help you stay on budget and pick a loan that fits your project and financial situation. You can manage renovations smoothly and effectively with proper planning and the right loan.

Options for Financing Home Renovations

When financing a home renovation, you have various options to consider. Here are some of the most popular methods for funding home improvements, when each option is most effective, and how to plan for a home remodel. 

It’s important to compare options like home equity loans with non-equity choices such as personal loans and credit cards. The ideal payment method for your renovation will ultimately depend on your specific plans and financial circumstances.

1.     Financing With a Low Credit Score

A low credit score usually makes qualifying for traditional home improvement loans difficult. However, homeowners with bad credit still have options available. Be aware that borrowing costs may be higher, so exploring all alternatives is important before opting for an unsecured loan to fund your renovations.

Personal Loans

Personal loans can be a flexible option for financing home renovations, though they aren’t specifically designed for this purpose. These unsecured loans don’t require collateral and depend largely on your credit score and financial history. 

While some lenders might approve loans with credit scores as low as 580, you’ll likely face higher interest rates. Conversely, higher credit scores generally qualify for better rates. Personal loans offer fixed interest rates and typically have shorter terms of 2-5 years, leading to higher monthly payments.

These loans are advantageous because they don’t require collateral and can be used for various needs, including urgent repairs. They are processed faster than home equity loans, making them suitable for immediate projects. However, they often come with higher interest rates compared to other options, particularly for lower credit scores, and may result in higher monthly payments. 

Repayment terms usually range from two to seven years, with some lenders extending up to 12 years. To get the best rates and terms, it’s important to shop around, as the lowest rates are usually available to those with excellent credit.

Credit Cards

Using a credit card for home renovations can be feasible for smaller projects or short-term needs, especially with cards offering 0% APR introductory rates, which can avoid finance charges if the balance is paid off within the promotional period of 15 to 18 months. 

However, interest will accrue once the promotional period ends, making it costly if the balance isn’t cleared. For those without a 0% APR offer, immediate interest charges apply, increasing the overall cost. 

Credit cards often have high interest rates, averaging around 23.37%, which can lead to significant debt if not managed carefully. They can be helpful for minor upgrades or emergencies but should be used cautiously due to their high rates and potential for accumulating debt.

2.     Cash-Out Refinance 

A cash-out refinance means taking out a new, larger mortgage to pay off your current one and using a variation in funds for home renovations. This method allows homeowners to access equity built up in their homes while potentially securing a lower mortgage rate, though current rates might be higher than the original.

For example, if your home is valued at $300,000 and you owe $100,000 on your mortgage, refinancing for $150,000 lets you pay off the old loan and use $50,000 for renovations. 

However, this option negates your progress on paying off your home, and higher mortgage rates could increase overall costs. Cash-out refinancing is ideal if you need substantial funds for a long-term renovation and can secure a better rate than your existing mortgage.

3.     Government Loans

Government loans offer several options for financing home renovations. One popular choice is the Title I loan, insured by the Federal Housing Administration (FHA). This loan allows you to borrow up to $25,000 for necessary home improvements, though it excludes luxury upgrades like swimming pools.

Another option is the Property Assessed Clean Energy (PACE) program, geared towards energy-efficient renovations such as solar panels or new appliances. PACE loans are tied to the property rather than the borrower, meaning the new owner inherits the loan if you sell your home. Repayments are made through property taxes, which could lead to a larger tax bill during the loan term.

For larger or more integrated projects, the FHA 203(k) loan combines renovation costs with your mortgage, which is useful if you’re buying a fixer-upper or refinancing an existing mortgage. 

Similarly, the HomeStyle Renovation Mortgage from Fannie Mae rolls renovation costs into the mortgage for purchasing or refinancing a home. VA loans can also be used for home improvements. 

Government-backed loans, like Title I and 203(k), generally have lower interest rates compared to other unsecured loans, making them an attractive option for those who qualify. However, availability can vary by lender and location, so it’s important to research lenders who offer these government-backed programs.

4.     Home Equity Loans

Homeowners can borrow a lump sum based on the equity in their property, using their home as collateral using home equity loans. This kind of loan typically offers fixed interest rates and fixed monthly payments, making it a predictable option for budget-conscious individuals. 

Homeowners can generally borrow up to 90% of their home’s value minus the existing mortgage balance, with loan terms usually ranging from 5 to 30 years. This makes it a good choice for those who clearly understand their renovation costs and need a substantial amount of cash upfront.

Home equity loans with RenoFi are beneficial because they usually come with lower interest rates compared to credit cards or unsecured loans and they often help maximize borrowing power. 

Imagine your home is currently valued at $500,000, and your outstanding mortgage balance is $400,000. You are planning a renovation and expect that the after renovation value of your home would be approximately $640,000. Your current loan-to-value ratio (LTV) is at 80%, which means that you effectively can’t borrow anything to fund your renovation. A RenoFi loan, however, would allow you to go as high as 150% LTV or 90% LTV using the after-renovation value.

So, in this example, while using a standard home equity loan results in your borrowing power being $0, a RenoFi loan allows you to borrow up to $176,000, thanks to the after renovation value of your home!

If you are considering a home renovation, RenoFi is by far the smartest way to finance your project. Learn more and explore your borrowing options here.

5.     Home Equity Lines of Credit

A Home Equity Line of Credit (HELOC) lets you borrow against your home’s equity, offering a revolving credit line rather than a lump sum. You can withdraw funds up to your credit limit during the draw period, which usually lasts 10 years, and you only need to pay interest on the amount used. 

After this period, the repayment phase begins, typically lasting 15-20 years, during which you pay both principal and interest. HELOCs often have lower interest rates than other loans but have variable rates, meaning your payments can fluctuate based on market conditions.

HELOCs offer flexibility in borrowing and repayment but come with risks. Missing payments could lead to foreclosure, as the home serves as collateral. Additionally, lenders can freeze your credit line if they doubt your repayment ability. While HELOCs generally have lower initial rates compared to other loans, it’s crucial to understand the terms and manage payments carefully to avoid financial strain.

Keep in mind that a standard 90% LTV HELOC might not cover all your renovation needs due to limited equity. Therefore, RenoFi loans help by considering your home’s value after renovations, boosting the available equity. 

Choosing the Right Financing Option

Selecting the best financing option for home renovation depends on several factors:

Project Size and Scope

A home equity loan, HELOC, or cash-out refinance might be more suitable for extensive renovations. For smaller projects, personal loans or credit cards could suffice.

Home Equity

If you have substantial home equity, home equity loans and HELOCs are viable options. Government loans or personal loans might be better if you don’t have much equity.

Interest Rates

Compare the interest rates of each option. Home equity loans and HELOCs often have lower rates than personal loans and credit cards.

Repayment Terms

Consider how long you want to repay the loan. Home equity loans and cash-out refinances often have longer terms compared to personal loans and credit cards.

Risk Tolerance

Remember that using your home as collateral involves risk. If you’re unable to repay, you should be comfortable with the possibility of foreclosure.

Conclusion

With the right financing strategy, you can transform your home into a valuable space while effectively managing your finances. RenoFi does exactly this, bridging the gap between your renovation dreams and financial reality.

RenoFi offers the most strategic financing option if you’re planning a home renovation. Our RenoFi loans are tailored specifically for renovation projects, unlike traditional loans that rely on your home’s current value or require you to refinance and give up your low mortgage rate. With RenoFi, you can borrow up to 11 times more than typical options, all based on your home’s value after the renovations. This means you get a manageable monthly payment while keeping your existing mortgage rate.

Explore RenoFi’s tailored financing options today and start your renovation journey with confidence!