Home Improvement Financing: Funding For Your Next Project

Home improvement financing refers to the various methods homeowners can use to fund renovations, repairs, or home upgrades.

Home improvement financing refers to the several methods homeowners use to fund renovations, repairs, or upgrades. While saving up and paying out-of-pocket is ideal, it’s not always possible. In such cases, you might consider options like using a credit card, taking out a personal or home improvement loan, or tapping into your home’s existing equity through a HELOC.

These financing options provide the money needed to cover the renovation expenses and then pay off the borrowed amount in a way that suits the borrower’s budget. Simply put, they offer every homeowner the opportunity to enhance their property’s aesthetics and functionality on their terms, whenever and however they like.

However, it is essential to choose the right financing option based on your financial situation and renovation goals. Doing so helps you avoid unnecessary debt and get the most value from an investment.

In this article, we’ll walk through the ins and outs of financing home renovations, examine different types of home loans available, and give you all the details you need to make informed decisions throughout this journey.

How Home Improvement Financing Works

With inflation at high levels, home renovations are becoming more expensive than ever. Many property owners now show a keen interest in home improvement financing to counter this high rate. Here’s a simple rundown of how home improvement financing actually works:

• Compare the Options: Look at different deals for an improvement project. Find the best interest rates, fees, monthly payments, and overall loan costs within your budget.
• Apply for the Loan: Once the application is approved, you start receiving funds for the repair. If you are an existing customer, these funds may arrive on the same day as the approval.
• Use the Funds: Use the lump sum to finance your home improvement projects, which can enhance your living space and increase your property value.
• Repay the Loan: Pay back the loan in fixed monthly installments. You can also pay off the loan early, but be aware of potential early repayment fees that may apply.

Best Ways to Fund Your Home Improvements

Home improvement projects can come with a hefty price tag, which makes finding the right financing deal essential. Fortunately, there are plenty of options available to choose from based on the homeowner’s unique situation. These include:

1.     Home Equity Loans

Home equity loans are perfect for homeowners who have more value in their homes than they owe on their mortgages.

These loans are based on your home’s equity and are given as a lump sum. They usually come with a fixed interest rate and are repaid over the span of 5 to 30 years. You can typically borrow up to 85% of your home’s equity.

You can apply for a home equity loan through banks, credit unions, or online lenders, with interest rates and terms based on your credit score. Since your home secures these loans, they often come with lower interest rates for renovations. Plus, you can deduct the interest on your taxes if you use the funds for home improvements.

However, a major downside is that if you don’t repay the loan, you could face serious consequences, including the risk of foreclosure.

Benefits

• Fixed monthly payments
• Interest may be tax deductible for home improvements

Drawbacks

• Requires a good credit score for the best rates
• Property value drop could leave you owing more than your home is worth
• Risk of foreclosure if you default

2.     Home Equity Lines of Credit (HELOC)

A HELOC is another option for financing home improvements using your home’s equity. Unlike home equity loans, it works more like a credit card, allowing you to withdraw funds as needed during a set period, with either fixed or variable interest rates.

HELOCs often come with some of the lowest interest rates, helping to keep your monthly payments low while you work on your improvements. They’re great for ongoing projects since you don’t have to use all the credit at once; you can continue to draw from it as needed until the draw period ends, which usually lasts about ten years.

HELOCs offer far greater timing and amount flexibility than a home equity loan, making them an excellent option for smaller, ongoing projects. Plus, with RenoFi HELOC Loans, you can borrow significantly more than a typical home equity loan.

For instance, imagine your home is valued at $500,000 with an outstanding mortgage of $400,000. You plan to renovate and anticipate the value to rise to about $640,000 afterward. Given your current loan-to-value ratio (LTV) of around 80%, funding this renovation might seem impossible.

However, RenoFi loans can allow you to reach up to 90% or 150% LTV, focusing more on your property’s post-renovation value. In this case, you could borrow as much as $176,000, compared to $0 with a standard equity loan!

However, be mindful that missing a HELOC payment could result in a higher interest rate, late fees, and a hit to your credit score.

Benefits

• Interest may be tax-deductible for home improvements
• Flexible repayment terms of up to 30 years
• Often lower interest rates

Drawbacks

• Variable interest rates can change
• Risk of overspending with a line of credit
• Potential foreclosure if you can’t repay

3.     Personal Loans

Personal loans are mainly used to finance a small or midsize home project. These loans are especially useful for quick emergency repairs since the borrowed money can be accessed within a day or two after approval. 

A personal loan is similar to a home equity loan in that you receive all the funds upfront and make fixed-rate payments. The difference is that personal loans are typically unsecured, so you don’t risk losing your home if you can’t repay. They’re a good option if you don’t have enough home equity to cover your renovation costs.

Various lenders offer these unsecured loans. Terms usually range from one to seven years, and interest rates range between 7% and 36%. Rates can be higher for those with bad credit, but excellent credit borrowers might find rates similar to home equity loans.

Unlike HELOCs or credit cards, personal loans provide funds in a lump sum, which means less flexibility. If your project ends up costing more than planned, you might need to borrow more.

Benefits

• No collateral required
• Fast funding
• Fixed payments

Drawbacks

• No tax benefits
• Potentially high interest rates

4.     Cash-Out Refinancing

A cash-out refinance is ideal for property owners considering major home upgrades. This type of refinancing spreads the payments over 30 years while keeping the monthly payments low.

With this option, you take out a new mortgage for more than you owe on your home. You then use that extra cash for your renovation. You can access this money if you have extra equity in your home.

You’ll get the funds all at once and can usually pick a fixed interest rate with a term of up to 30 years. However, borrowing more than 80% of your home’s value is not usually allowed.

But, if your current mortgage rate is lower than today’s, refinancing might not be the best choice. Plus, you might face higher closing costs because the loan amount is often larger than home equity or personal loans.

Benefits

• Lowers your monthly mortgage payment
• Switch from an adjustable rate to a fixed-rate mortgage
• Helps secure a lower interest rate

Drawbacks

• Increases your total debt
• Requires good to excellent credit to qualify

5.     Credit Card

Using a credit card strategically can be a practical way to finance home improvements. Home improvement store cards often offer cashback on purchases, while a 0% introductory APR card covers short-term renovation costs without accruing interest. This approach is best for smaller projects where you won’t exceed your credit limit.

To make the most of credit cards for renovations, aim to pay off the full balance each month to avoid interest charges. Keep in mind that you’ll generally need good to excellent credit to qualify for cards with 0% APR or rewards.

Benefits

• Chances to earn rewards on your purchases
• Access funds as needed to help avoid excessive debt
• Save on interest with 0% APR cards if paid off within the introductory period

Drawbacks

• High interest if not paid off each billing cycle
• Risk of overspending and debt
• Managing multiple cards can be tough

6.     Government Assistance

Several government programs are available to assist with home renovations. The Federal Housing Administration (FHA) offers Title I loans and Energy Efficient Mortgages specifically for property improvements.

The FHA Title I Loan is designed for home improvement projects, providing up to $25,000 for a single-family home and up to $12,000 per unit for multi-family homes. These fixed-rate loans are insured by the FHA and backed by the US Department of Housing and Urban Development (HUD). One advantage of Title I loans is that they do not require a down payment or any home equity.

Additionally, the Inflation Reduction Act of 2022 provides tax credits for energy-efficient updates like new doors, windows, insulation, and HVAC systems. These programs can make your upgrades more affordable, so it’s worth considering if your project fits their criteria.

Benefits

• Increased likelihood of working with a reputable lender
• Title I loans are available to tenants as well as homeowners
• Accessible to individuals with less-than-perfect credit

Drawbacks

• Loan funds should be used for improvements that boost the livability of your home, not for luxury items
• Each loan comes with specific eligibility requirements that must be met to qualify

Choosing the Best Way to Finance Your Home Improvement

Deciding how to finance your home improvement is a big step. It can be pricey, and if you don’t pay it off early, you could be dealing with debt for years.

This is where our experts at RenoFi come in. We are dedicated to providing you with the best resources and insights to finance your home improvement project smartly.

That said, here are some key factors to consider before starting the home improvement journey.

Financing Amount Considerations

Each financing option has its own benefits and limitations. Consider these when determining whether a finance scheme aligns with your needs and vision.

For example, personal loans and home equity loans provide a lump sum upfront, so once you use it up, you can’t borrow more. On the other hand, HELOCs and credit cards are revolving, meaning you can borrow, repay, and borrow again as long as you stay within your credit limit.

A home improvement loan or an equity-based loan might be a better fit for medium to large projects since they offer more funds and longer repayment terms. For smaller projects, a credit card you can pay off quickly could be more convenient and easier to manage.

Timing of Fund Access

Opt for quick funding options like same-day home improvement loans or credit cards with instant approval for urgent repairs. If your project can wait a bit, equity-based loans or lines of credit might offer lower rates, though they take longer due to the required appraisal process.

Understanding Your Financing Options

Qualifying for financing depends on several factors, including your credit score and debt-to-income (DTI) ratio. You might still get a home improvement loan if your credit needs improvement, but expect higher interest rates.

With good to excellent credit, you have more options, such as equity-based loans, lines of credit, or credit cards, which often require a score of 620 or higher. Some lenders need a score of 660 to 680.

Fee Considerations

When it comes to home improvement loans, fees can vary widely depending on the option you choose. If you’re okay with some fees in exchange for a lower interest rate, equity-based loans like home equity loans or HELOCs might be your best bet. However, remember that they typically come with closing costs and possible annual fees.

On the other hand, consider options with lower fees if you are on a tight budget and watch out for origination fees. Credit cards, too, can carry annual fees, so it’s essential to consider these costs when deciding.

Risk Tolerance

Every financing option comes with its own level of risk, so it’s essential to consider how much you’re willing to take on. If you prefer a safer route, even with higher interest rates, options like personal loans and credit cards might be for you since they don’t put your home on the line.

However, if you’re open to more risk in exchange for lower rates, equity-based loans like home equity loans or HELOCs could be worth it. Remember, failing to repay these could cost you your home.

Conclusion

Revamping your home can be both a personal and financially gratifying experience. You can enhance your property’s value and lifestyle with the right financing. That is exactly what we at RenoFi are committed to doing.

RenoFi offers a smart way to fund your home improvement projects, whether big or small. Unlike traditional loans that rely on your current property value and often require refinancing your main mortgage, RenoFi loans are based on the projected value of your home after the renovation.

With RenoFi, you can borrow up to 11 times more than with a standard HELOC, enjoy lower monthly payments, and keep the favorable rate on your primary mortgage. Our team is committed to helping you find the best financing solution for your renovation needs and ensuring the final outcome aligns with your vision.

Discover the financing options tailored to your situation, and start your RenoFi loan today!