11 best ways to finance a home remodel

Remodeling your home can be an exciting way to add comfort, style, and long-term value—but it often comes with a hefty upfront price tag. Whether you're upgrading a single room or doing a full renovation, figuring out how to pay for it is just as important as choosing the right design.

In this article, we’ll explain the best ways to finance a home remodel and what options might make sense for your situation.

Best way to finance a home remodel

Here are eleven different ways to finance a home improvement project.

Cash savings

The best way to finance a home remodel is to keep costs low enough to pay out of pocket. This is the most straightforward and affordable way to tackle home improvements. Using cash can help you avoid interest charges, loan fees, and monthly payments.

However, it’s important to make sure your remodel doesn’t drain your emergency fund or leave you without a financial cushion. If you have enough savings set aside, funding your renovation with cash can be a smart, stress-free way to invest in your home.

Home improvement loan 

Home improvement loans are personal loans that you can use to update your house. You’ll receive a lump sum and repay the loan via fixed monthly payments over a term of 1 to 7 years. Some lenders brand certain personal loans as home improvement loans, but you can use any personal loan for renovations.

These types of loans are generally cheaper upfront and quicker to obtain than other options. So, if you need cash fast, need a relatively small amount, or don’t want to use your house as collateral, a home improvement loan may be a good option.

To qualify for a home improvement loan, you’ll usually need a credit score above 620, stable income, and a debt-to-credit ratio of 43% or lower.

Contractor financing

Some contractors offer financing options to complete home remodels. This allows homeowners to obtain funding through the contracting company, rather than seeking financing independently.

Contractor financing works similarly to a personal loan in terms of repayment. However, some contractors may offer lower interest rates or special offers (like a promo period) that make it more appealing. 

Borrowers should have a good credit score, a low debt-to-income ratio (DTI), and proof of employment.

0% APR card

It’s generally not recommended to put large balances on a credit card. However, with a 0% APR credit card, you can get an introductory promotional period that will help mitigate interest – as long as you can pay it off within the timeframe. The 0% APR can last anywhere from a few months up to 18 months or more. Once the promotional period ends, the credit card APR reverts to a higher rate.

To qualify for a 0% APR credit card, you’ll need to shop around, plus have a good credit score and history.

Government-backed loans

Government-backed loans can be a helpful option for homeowners looking to finance a remodel with limited equity or less-than-perfect credit. 

Programs like FHA 203(k) loans and VA renovation loans are designed to make home improvements more accessible by offering competitive interest rates and flexible qualification requirements. These loans bundle the cost of your home and the renovation into a single mortgage, making them ideal for buyers purchasing a fixer-upper or current homeowners planning major upgrades. 

While the application process can be more involved, the long-term savings and support may be worth the extra steps.

Home equity loan

A home equity loan is a fixed-interest-rate loan that uses your house as collateral. As a result, these loans typically have lower rates than personal loans—which can help keep costs low if you need to borrow a large amount. 

You’ll repay the balance via set monthly payments over a 5 to 30-year term. Failure to make payments can result in a home foreclosure, so it’s critical to have a repayment plan. 

To qualify for a home equity loan, you must have 15% to 20% equity in your house. Additionally, you’ll need a credit score of 620 or higher, a DTI ratio of 43% or less, and sufficient income.

Home equity line of credit (HELOC)

A HELOC lets you borrow against the equity in your home through a flexible, revolving line of credit. During the draw period, you can access funds as needed—up to your approved credit limit—and you’re typically only required to make interest payments. 

Once the draw period ends, the loan enters the repayment phase, where you'll begin making monthly payments that include both principal and interest. It can be a flexible option if you’re unsure of exactly how much you’ll need to borrow or expect to have ongoing costs. 

You must have 15% to 20% equity in your home, a credit score above 680, a DTI ratio of 43% or less, and a steady income to qualify for a HELOC.

Home equity investment

A home equity investment (HEI) is another way to tap your equity for a lump sum payout. However, unlike home equity loans, there are no monthly payments. Instead, you repay the investment plus a share of appreciation when you decide to buy back your equity, anytime during a flexible 30-year term. 

Homeowners must have sufficient equity to qualify for an HEI. However, there are no income requirements, and you don’t need great credit to apply.

You can prequalify without impacting your credit here.

Cash-out refinance

A cash-out refinance is when you replace your current mortgage with a new, larger loan and pocket the difference in cash. Since you’re effectively giving up your mortgage, you’ll get a new rate and term. Therefore, refinancing makes sense if you can get a lower interest rate on your home loan or more favorable terms to offset the closing costs and fees. 

Applying for a cash-out refinance is a similar process to applying for a mortgage. You’ll need a good credit score, a low DTI ratio, and at least two years of steady income.

401(k) loans

A 401(k) loan allows you to borrow from your retirement savings, typically up to 50% of your vested balance or $50,000, whichever is less. You'll then repay the loan through standard payroll deductions over a 5-year term. 

The major benefit is that 401(k) loans are penalty-free, and the interest you pay goes back into your own retirement account. 

However, there are major risks to consider—if you leave your job or are laid off, the loan may need to be repaid quickly to avoid taxes and penalties. And more notably, failing to match catch-up contributions could put you in a real bind come retirement. 

Grants

A final option to consider is local and government grants for home improvements. Grants are funds that eligible homeowners do not have to pay back. Here are some examples:

• Low Income Home Energy Assistance Program (LIHEAP): Helps qualified low-income families pay for energy-related home repairs to help reduce energy bills.
• USDA Single Family Housing Repair Grants: Provides grants to qualified elderly low-income homeowners to help improve the health and safety of their homes.

Many local city and state governments also offer home improvement grants to qualified residents.

Frequently asked questions

How do most people finance home renovations?

Most people finance home renovations through a combination of methods, depending on their financial situation and the size of the project. According to the How America Renovates research report from Block, 73% of Americans finance renovations using their savings. Then, 17% use credit cards, 15% use a home equity loan or HELOC, and 9% use personal loans. 

What is the best way to borrow money for home renovations?

The best way to borrow money for a home remodel will depend on your personal financial situation and your specific goals. For example, a homeowner who wants cash to renovate but doesn’t want to make monthly payments would benefit from getting a Home Equity Investment or using their own savings. 

A homeowner who wants to borrow a small loan amount for a renovation project might find a credit card with 0% financing useful. On the other hand, a homeowner who wants to streamline their finances and repay a loan in equal monthly installments might prefer a home equity loan.

Before choosing a financing option, take the time to understand the benefits and drawbacks of each option mentioned above to see which would be the best fit for your renovation idea.

Is it better to finance renovations or pay cash?

Paying cash can save you money in the long run since you avoid interest charges, loan fees, and monthly payments. It also gives you full control over your budget without relying on lender approval. 

However, financing can be a smart choice if you want to preserve your savings, take on a larger project, or take advantage of low interest rates. Ultimately, the right approach depends on how much cash you have available, the size of the remodel, and your comfort with taking on debt.

Final thoughts

Homeowners have several options when it comes to financing a home remodel, and the best choice for you will depend on your financial goals and the cost of the project.

Interested in learning more about how to fund a renovation without monthly payments? Find out more about home equity investments.