Should you finance home renovations?
To consider whether you'll need to borrow for home improvements, you'll need to estimate your home renovation costs. HomeAdvisor notes average home renovations and remodels in 2023 cost $48,303. However, individual projects significantly shape the budget. A good starting place to figure out the cost of your project is looking at the average price of the project you want to do. However, if you want a more accurate estimate, you should contact contractors in your area for free quotes on how much they would charge for your project.
Here's an in-depth guide to home renovation costs in 2023.
5 Best ways to finance home renovations
Home equity loan
Home equity loans enable borrowers to secure a second mortgage using their home's equity. Lenders use the property as collateral and offer a lump sum payout in cash — repaid through a new monthly mortgage payment.
Home equity loans have a fixed interest rate lower than credit cards but higher than your first mortgage. These loans typically require a credit score of at least 680. You have up to 30 years to repay a home equity loan. However, the balance remaining on home equity loans is also due when you sell your home.
If you have a lot of equity in your home, home equity loans could be a good choice for financing your renovation. However, other home equity loan alternatives may offer the best rate depending on the market.
Pros:
- Lump sum at closing
- Fixed/ possibly tax-deductible interest rate
- Predictable monthly payments
Cons:
- Risk of foreclosure if you default
- Costly monthly payments
- Need decent credit and solid ownership of the equity in your home
Home equity line of credit (HELOC)
Home equity lines of credit (HELOCs) are another option for using equity as a way to finance your home renovations. Much like home equity loans, you can borrow up to 85% of the value of your home minus the remaining amount of your 1st mortgage. However, unlike home equity loans, borrowers get a revolving line of credit rather than a lump sum.
There are two periods during the lifetime of HELOCs — the draw period and the repayment period. During the draw period (usually ten years), you can withdraw money up to the limit set when you open a HELOC. At this time, you only need to pay the interest on the money you use. Paying the principal balance is optional.
You can't use any HELOC funds during the repayment period (usually 15-20 years). During this period, you have monthly repayments to make based on what you borrowed and interest. Unfortunately, HELOCs don't have fixed interest rates, so how much interest you repay depends on current rates.
One necessary condition to note is that lenders can freeze your line of credit if they don't think you'll be able to repay what you've spent.
Pros:
- Flexible amount
- Can withdraw multiple times
- Potentially tax-deductible interest
Cons:
- Variable interest rate with strict credit requirements
- Risk foreclosure if you default
- Added monthly expense
Cash-out refinance
Cash-out refinancing involves replacing your original mortgage with a new, larger one — and pocketing the difference between the amount you owe on your home and the new loan. In addition to getting cash, homeowners can often get a lower mortgage rate.
The most considerable downside of cash-out refinancing is that you're taking out a loan that negates your progress toward paying off your home. In effect, you're selling the equity you've earned back to the bank.
The current average rate for a 30-year fixed refinance is 6.78%, and the average for a 15-year fixed-rate refinance is 6.07%.
Pros:
- You can leverage your equity for cash
- Fixed-rate
- Interest rates have the potential to be tax-deductible
Cons:
- High closing costs — credit check, appraisal, closing fees
- Current rates will likely increase your mortgage rate
- Could owe more on your home than it's worth in a market downturn
Government loans
You can also finance your home renovations through government loans. One of the most popular government loans is a Title I loan insured by the Federal Housing Administration (FHA). With this loan, you can borrow up to $25,000 for your renovation project. However, you can only make improvements to your home that are necessary or improve its function – not luxury improvements (like adding a pool).
Property Assessed Clean Energy Programs (PACE) loans are another option. These loans are only for energy-efficient renovations – like new appliances or solar panels. PACE loans are a good option if you have bad credit because your credit isn’t a significant eligibility factor.
This loan is attached to the property – not the original borrower. So, for example, your loan will be the next property owner’s responsibility if you sell your home. You might struggle to attract buyers if you haven’t paid off your PACE loan when you’re trying to sell, as many buyers don’t want to assume another loan when buying a new home.
Your repayment term can be as long as 25 years. You also repay a PACE loan through property taxes, not a separate loan payment. The downside of repaying it through taxes is that you’ll have a huge tax bill while you’re repaying.
If you struggle to qualify for traditional loans and have a smaller project, government loans can be a good option for your renovation.
Pros:
- Easier qualifications
- Some loans don’t have monthly payments
- Lower interest rate
Cons:
- Low maximum loan amount
- Possible lien on your home
- Only covers specific improvements
Home Equity Investment (HEI)
A Home Equity Investment (HEI) is one of the best ways homeowners can leverage their home's equity to finance home renovations. With a Home Equity Investment (HEI), a company like Point invests in a portion of your home's equity for a lump sum of cash. Point offers flexible terms while you retain ownership and control of your home.
There are no monthly payments, and homeowners are free to buy back their equity anytime within a 30-year term — without prepayment penalties. In exchange, you repay the amount plus a percentage of your home's appreciated value over the period. It's a homeowner-friendly and flexible option for financing home repairs.
Point also works with a wide range of homeowners compared to traditional lenders. Such as those with lower credit scores or homeowners with higher debt-to-income ratios. If you cannot qualify for other financing options due to your financial situation, you still have an excellent chance to be eligible with Point.
Pros
- Not a loan
- You don't need great credit to qualify
- No monthly payments
- Can be used for home renovation costs or whatever you need — no restrictions
Cons
- Minimum funding amount of $35,000
- Point may need to pay off some of your creditors with part of your funds
- Not yet available nationwide
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Financing with bad credit
A bad credit score typically disqualifies you from traditional home improvement loans, such as home equity loans or HELOCs. However, there are still options for homeowners with bad credit. The cost of borrowing will likely be more expensive, so you should consider all options before using an unsecured method to cover renovation costs.
Personal loans
Though not specifically for remodeling your home, you can use a personal loan to finance your home renovations. Personal loans are usually unsecured, so they don’t have collateral like home equity loans or HELOCs. As a result, personal loans typically depend entirely on your credit score and economic history. For example, some lenders will qualify you with a credit score as low as 580, but you’ll have a significantly higher interest rate. Conversely, you’ll get a lower-interest loan if you have a good credit score.
Personal loans have shorter loan terms, usually 2-5 years, which will likely result in higher monthly payments. Lenders typically offer fixed interest rates, so you’ll have predictable monthly payments.
Pros:
- No collateral needed
- Fixed interest rate
- Accepts low credit scores
Cons:
- Short repayment terms
- High-interest rates (especially for low credit scores)
- High monthly payments
Credit card
Another commonly used way to finance home renovations is using a credit card. Nearly everyone has a credit card, so they offer an easy source of financing. For example, if you have a very high limit on one card, you can entirely finance your renovation with one credit card. You can also spread the renovation cost between several lower-limit cards.
While credit cards are an easy way to pay for your renovation, they should be used carefully. Credit cards generally have very high-interest rates – the current average rate is 23.37%. Unfortunately, the high-interest rates also make it easy to get into a payment hole you can’t get out of — making it nearly impossible to pay off your project.
Pros
- Easy to obtain
- Potentially able to finance the entire renovation
- You are only required to make a minimum monthly payment
Cons
- Very high-interest rates
- Likely to pay more over the lifetime of your project
- Easy to become overwhelmed with paying for your project
Deciding how to finance home renovations
Renovating your home can be an exciting time. You get to update your home and ensure everything is in working order. However, choosing how to finance renovations can take time and effort.
An experienced team member at Point is happy to help you compare options and decide which one best suits your financial needs. Looking to compare home equity products? Check out our comprehensive guide here.
Using the equity in your home is a popular way to cover renovation costs. A home equity investment from Point can be one of your best resources. With an HEI, you can receive cash for renovations without monthly payments. Point can help you secure the funds you need to enjoy your home for many years — contact one of our knowledgeable team members to learn more.
