Let’s be honest: Home renovations are expensive. Though a simple half-bath remodel costs just $5,000, a high-end kitchen renovation can cost upwards of $65,000. If you don’t have the cash to bankroll your project, you’ll need to secure financing.
Popular financing avenues for home renovations include:
Choosing the lending option that is best for you depends on the project you’re tackling and how much time you need to pay back the money. In this guide, we provide more information about each financing tool and list the pros and cons of each.
Cash is king, especially when it comes to affording home renovations. Though stowing away enough money to fund a major remodel takes time, it can save you thousands of dollars in interest and other fees.
But there are downsides to funding your home’s makeover with cash. You might be waiting months or even years to rustle up enough money. Also, by earmarking your cash, you could be missing out on higher-yielding investment opportunities.
Some homeowners jumpstart their savings with inheritance while others liquidate assets like stocks, bonds, and even vehicles. But there are many different ways to save money in a hurry.
Generally, it’s recommended that homeowners:
A home equity loan, also called a second mortgage, allows homeowners to borrow a lump sum against the equity in their home. This loan has a fixed interest rate and is amortized over five to 20 years.
Equity is calculated by dividing your mortgage balance by your home’s current market value. A lender will use an appraisal to determine the latter. They’ll also reference your credit score and payment history to determine the loan terms.
A home equity loan is a popular financing tool because it allows homeowners to unlock their hard-earned equity. However, it’s risky. Since the home is used as collateral, the homeowner risks foreclosure if they don’t repay their debts.
A home equity line of credit, or HELOC for short, is a revolving line of credit that uses your home as collateral. It’s similar to a home equity loan, but with two key differences:
A HELOC is a good choice if you’re unsure of your budget and don’t want to be responsible for a large amount of consumer debt. It can also serve as a buffer for those who have the cash to pay for renovations but need a little extra to finish the work.
Generally, credit cards are a bad idea when it comes to financing home renovations. Credit card debt is unsecured, so lenders can charge high interest rates. Plus, failure to pay may result in bankruptcy.
So, when are credit cards a good idea?
If a dire situation forces you to rack up credit card debt, don’t despair. You can easily consolidate debts at a lower interest rate using a home equity loan. You can also refinance with a balance transfer card, which essentially moves the debts to another credit card with a lower interest rate.
Compared to a traditional mortgage refinance, which simply changes the interest rate or loan term, a cash-out refinance grants homeowners a larger loan. With this larger loan, you can pay off your original mortgage and then pocket the difference.
A cash-out refinance is a savvy borrowing tool because, unlike with a home equity loan, homeowners are left with just one mortgage. They can also secure a loan with better terms. However, the cost to refinance can be fairly pricey – about 2-6% of the final loan amount.
Bankrolling home renovations can be stressful. If you don’t have the time or income to save enough cash, you’ll need to borrow money. However, since many loans have high interest rates and require that you use your home as collateral, you shouldn’t jump into financing blindly.
At Portico, we specialize in helping clients create their dream homes with minimal worry. Understanding that money is often a concern in home renovation projects, we guarantee transparent pricing and always work within your budget.