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How to finance a home renovation

Everything you need to know about upgrading your digs -- without going broke.

couple renovating home

The good news is that there are plenty of ways to finance a home renovation without upending your monthly budget.

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It comes out of nowhere: All of a sudden, you hate the color of your walls. Or your bathroom sink. Or your kitchen countertop. 

Home renovations have been a popular method of whiling away the hours stuck at home during the pandemic. Searches for "home remodel ideas," "home renovation cost," and "DIY home renovation" peaked between April and October of last year, according to an analysis by Rocket Mortgage. And this year alone, more than half of US homeowners made "substantial improvements" to their homes, according to a July survey commissioned by Selective Insurance. 

There's no question about the power of a renovation to boost your home value. But unless you've got piles of cash lying around, you may be wondering how to pay for improvements. The good news is that there are plenty of ways to finance a home renovation without upending your monthly budget. Whether you're planning to sell your house, expand your space or are simply craving change, here are a few ways to finance the renovation projects on your list. 

Leverage your home equity

Most homeowners have a large chunk of their net worth tied up in their home equity. And it's an excellent time to be in that position: The average sales price of existing single-family homes rose by 22.9% to $357,900, according to a report released Aug. 12 by the National Association of Realtors. When your equity is ballooning, it can be a good time to tap into it. Here are a few ways to do it:

Home equity loan

These secured loans let you borrow a lump sum against your home equity and typically come with a fixed interest rate and repayment period of 15 or 20 years. Lenders usually require at least 15% home equity to qualify, and your specific loan terms will depend on your income, credit score and debt payment history. Many lenders offer home equity loans, and it's a good idea to negotiate with a few to get the best fixed interest rate, fees and mortgage point prices available. 

Cash-out refinance

Rather than appending a second loan to your original mortgage like a home equity loan, a cash-out refinance pays off your first mortgage, replaces it with a new (larger) one and nets you the difference in cash. You'll need a bit more equity to qualify compared to a home equity loan: typically, banks allow you to borrow up to 80% of the loan-to-value ratio, leaving 20% equity in your home.

Of all the ways you can tap into your home equity, the fixed interest rates for this type of loan are usually the lowest because they are repaid before home equity loans during bankruptcy or foreclosure. That said, your loan terms will depend on specifics like your home value, income, credit score and other factors.

Home equity line of credit

Like a home equity loan, a HELOC typically requires 15% home equity to qualify. But where a home equity loan provides you with a lump sum, a HELOC is a revolving line of credit with a preset limit and variable interest rate. Akin to a credit card, a HELOC allows you to withdraw, repay and then withdraw funds again whenever you choose. A HELOC also offers more flexibility when accessing your money by attaching a checking account to the funds. However, keep in mind that there's a trade-off for convenience; like other types of revolving credit, HELOCs typically come with the highest variable interest rates.

Apply for a home improvement loan

There are government loans specifically aimed at home renovation and qualifying for them is generally easier than applying for a home loan. Here are your options. 

FHA 203(k) mortgage

This type of FHA-insured loan allows you to refinance your first mortgage by combining it with home improvement costs of $5,000 or more into a new loan. Once your renovation is complete, the amount of your new loan is assessed based on a) the original value of the property plus or renovations, or b) 110% of the appraised value after renovations -- whichever is less. The average loan term is 30 years, but loan limits vary significantly by location, which you can learn more about here

Title I Property Improvement Loan Program

If you have little or no equity in your home, an FHA Title I loan may be the best option. Authorized by the National Housing Act, qualified lenders provide these loans with FHA insurance against possible losses. Interest rates are negotiated between the borrower and the lender, and the maximum amount you can borrow for a single-family home is $25,000 over a 20-year term or $25,090 over 15 years for a manufactured home. A Title I loan won't alter the status of your mortgage and qualifying comes with a simple set of requirements, including:

  • Ownership of the property or a long-term lease on it
  • A completed application that shows you are a good credit risk
  • Execution of a note agreeing to repay the loan

You can use funds from a Title I loan to make any "livable and useful" improvements to your home, including architectural and engineering costs, building permit fees, title examination costs, appraisal fees and inspection fees. You also have the option of hiring a contractor or using the funds for do-it-yourself projects. 

VA cash-out refinance loan 

Provided by a private lender and guaranteed by the Department of Veteran Affairs, a VA cash-out refinance loan allows veterans, active-duty service members, National Guard and Army Reserve members to replace their current mortgages with new loans and use the difference to make home improvements. The amount you can borrow depends on your income and credit score -- and your assets and whether you've previously used your VA benefit are also considered in the process. 

Use a zero-interest credit card

If you're working on a minor renovation that you can pay off quickly, you might consider financing your efforts with a zero-interest credit card. Some credit cards have up to 18 months of zero-interest periods, which would allow you to pay for the renovation without incurring other interest fees. Taking advantage of a credit card's zero-interest option means creating (and sticking to) a repayment schedule that clears your debt before the promotional period ends. As always, before using a credit card, carefully consider whether it's the right choice for you.