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How to finance home renovations

Learn 4 ways to finance home remodels

Profile picture of Zack Reeves
by Zack Reeves ConsumerAffairs Research Team
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Whether you’re installing a new kitchen design, remodeling your bathroom or overhauling your whole house, home renovations can cost a pretty penny. According to a recent survey, homeowners spend an average of over $50,000 on major home renovations, so you’ll want to budget plenty for this important undertaking.

You might not have the cash on hand for a full-scale home improvement project, but you could have access to more funds than you think. These tips can help you make the most of your resources so you can have the house of your dreams.

keys on a home loan

1. Lump sum home equity loans

If you have equity in your home to draw against, banks can loan you money by using that equity as collateral. Simply put, if you’ve paid off a large portion of your mortgage, banks can lend you a lump sum of something close to that portion. Remember that your ability to take out a loan is dependent on your credit and your ability to pay off that loan.

This is a helpful solution for expensive home improvements, but all loans have their drawbacks.

A lump sum home equity loan will reduce the available equity in your home, so you’ll be less able to take out these kinds of loans in the future. You’ll have to make monthly payments on a home equity loan, in addition to the mortgage you’re already paying. Banks use the amount you want to borrow and the length of your loan term to calculate your monthly rate.

For example, a loan of $21,000 (an average price for a full kitchen remodel) at 6 percent interest, would cost around $230 a month if you paid it off in 10 years. If you paid it off in 20 years, it would run you $150 a month. Check your monthly finances before you commit to such a large payment.

approved loan

2. Home equity line of credit (HELOC)

A home equity line of credit, sometimes called a HELOC, also uses the equity of your home as collateral. However, this loan is not distributed as a lump sum; instead, you can access this money when you need it via checks.

This line of credit is available over a certain amount of time, usually 10–20 years, and then the line of credit ends.

HELOCs can be useful for those who don’t yet know how much they’ll need to spend on their home improvement project. Note that the interest rate is variable, meaning you could be forced to make higher payments in the future.

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3. Personal loans

If you’re planning a large renovation and don’t have equity in your home, a personal loan can be a good option to finance your remodel. On average, personal loans are issued for between $1,000 and $50,000, though larger personal loans are available. These limits give you quite a lot to work with for your renovation budget.

Depending on your credit score and the state you live in, personal loan interest rates average around 10%, making them a little pricier than home equity loans but more affordable than credit cards. With a personal loan, you typically have between one and five years to repay the balance. Longer repayment terms reduce your monthly payments, but you pay more in interest over the life of the loan.

With a shorter repayment period, you want to make sure you don’t bite off more than you can chew with a large loan. For a $10,000 loan with a five-year repayment term, you’ll be looking at repaying $212 a month and paying more than $2,700 in interest.

three credit cards fanned out

4. Credit cards

Around a third of homeowners use credit cards to pay for their home improvement projects. If you don’t have the savings to pay for renovations, they can be a big help. And when you pay them off quickly, a hefty credit card bill could actually boost your credit score. Combined with the rewards some cards offer, this could translate to airline miles or cashback.

But they’re not perfect. While credit cards offer rewards for spending, the high interest rates could end up costing you more than you want to pay. For example, if you spend $3,000 on a credit card with a 17 percent interest rate, your minimum monthly payment might be somewhere around $72.50. Paying that every month, it would take you 63 months and an extra $1,500 to pay off the whole debt.

This is just one example, but it goes to show how easily credit card debt can get out of control. Talk with an accountant before taking out a large chunk of credit, as it could end up doing harm to your finances.

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Bottom line

While more homeowners are renovating their houses than in recent years, financing home improvement can be tricky. Without a large savings account, you may need to borrow from a lender. Talk your options out with a local bank before making a decision, since these choices can affect your personal finances for years to come.

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Profile picture of Zack Reeves
by Zack Reeves ConsumerAffairs Research Team

As part of the Consumer Affairs Research Team, Zack Reeves creates content that helps consumers make important decisions. He parses through fine details to present buyers with all the information they need to improve their lives.