How to Finance Your Home Renovation

By Mark Lemmons  I  June 9, 2022

How to Finance Your Home Renovation

Whether you are looking to remodel your home for your own enjoyment or add value before you sell, it’s important to understand your financing options. Home remodeling can be costly, and many homeowners need financial help to complete their renovation. But how do you know which financing strategy is right for your home renovation?

In this post, I’m going to walk you through 7 main financing options and define the scenarios each one works best in. Let’s get started!

1. Cash

If you are able to save, paying with cash is the best option. Paying cash for a home renovation doesn’t require any paperwork, dealing with interest rates, or making payments down the road. If you have a small to medium size project, saving and paying in cash is often the best option. The downside is that you may have to wait until you have all of the money saved to do the renovation. It’s always good to evaluate the risk and reward involved in any endeavor. If you are paying in cash, you risk losing time but are rewarded with zero debt on the other side.

I recommend using cash when you are not in a hurry to renovate and/or the project requires a financial investment you can afford to pay in cash.

3. Cash-Out Refinance

Another way you can finance your renovation is cash-out refinance. In this scenario, you refinance your mortgage for a higher value than the worth of your home and keep the difference in cash. This provides you with the funds needed for your home improvement project. The downside to this method is that the life of your home loan will be longer and take additional time to pay off.

I recommend cash-out refinancing when you can’t afford an additional monthly payment, need to make large renovations quickly, and plan to stay in your home long-term.

4. Home Equity Loan

A home equity loan is sometimes referred to as a second mortgage – because it’s literally like having a second mortgage! In this strategy, you borrow up to approximately 85% of your home’s value less what you currently owe. You receive this money in cash and are able to make payments on the loan at a fixed interest rate.

I recommend a home equity loan when you know the exact cost of your renovation project and you have the ability to make an additional monthly payment.

5. Home Equity Line of Credit

Another way to finance a home remodel is through a home equity line of credit (HELOC). This is similar to a home equity loan, except it is like having a credit card, not a loan. Instead of borrowing a fixed amount of cash, you get a certain amount on a credit line, that you can choose to use (or not). The rates on HELOCs are typically variable, which means that you will deal with fluctuating monthly payments as the interest rate changes. HELOC amounts can be up to 85% of your home’s value less what you owe on your mortgage, and you usually have 10 years to spend money with a HELOC and 20 years to pay of the balance.

I recommend using a HELOC when you aren’t sure exactly how much your renovation will cost and you have the ability to make an additional monthly payment.

6. Credit Card

Of course, you can also pay for home repairs or renovations with traditional credit cards from a bank. Using a credit card can make a lot of sense when you need to fund a DIY or short-term project and you can get a credit card with an interest-free period in which you can pay of the credit card. You will definitely need to have good credit to qualify for a 0% APR credit card.

I recommend using a credit card when the renovation is less than $2,000, you have good credit, and are able to make monthly payments.

7. Retirement Funds

Using retirement funds is another option for funding home renovations – but it is way riskier. If you withdraw money from your retirement accounts, you will have to pay income tax, whether it’s a 401(k) plan or a traditional IRA. You will also pay an early withdrawal penalty if you are under 60 years of age. That means your $20,000 withdrawal could turn into less than $12,000 (assuming a 32% federal tax bracket and a 10% penalty). Sometimes you can work around these taxes if your employer allows you to borrow against your 401(k). However, if you lose your job for any reason, you will be required to pay back the entirety of the loan within 30-60 days.

I only recommend using retirement funds when your employer allows you to borrow against your 401(k), you can avoid taxes or penalties, and you have a lot of confidence in your job security.

Next Steps

If you need to fund a home renovation, it’s important to understand the nature of your options! The cost of your renovation, the terms of the loans or lines of credit you are considering, and your ideal timeline are all important factors to consider. If you need help deciding on how to finance your home renovation, don’t hesitate to reach out! I’d love to help you make a decision that best meets your needs and goals.

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