How to Finance Home Renovations: Explore Your Options

Planning on remodeling a bathroom or building a room addition soon? If so, you'll want to find out how to finance home renovations, so that your remodeling project fits into your budget and life. Financing options aren't all created equally, so it’s important to explore what's out there before you make a decision.

Create Your Home Renovation Budget

Before you review financing options, it's essential to understand how much your project will cost and how much you can afford. Think about the type of project you want to do, and talk to several home remodeling contractors to get quotes.

Once you have a firm estimate, add 10% to 20% to the final price to allow for any delays, surprises, and other potential costs. 

Paying Cash vs. Borrowing for Home Renovations

Now that you have an idea of how much your project will cost, it's time to decide whether to pay cash or pursue financing for your home renovation. You may find that a combination of the two works for you, as well.

Paying cash has its benefits, as it helps you avoid taking on additional debt and the costs of borrowing. It's also more direct, as you won't have to apply for financing or wait to hear the lender's decision. Of course, the drawback of paying cash is that doing so can take a bite out of your savings.

Financing your home renovation projects means you can spread the cost out over months or even years. Depending on the type of project and the type of loan, some of the cost of financing may be tax deductible.

What Affects Your Ability to Borrow

One important question to ask before you finance a home renovation is: can you borrow?

Your income, existing debt, and credit score will all impact the financing options available to you. A lender will take a look at how much you earn and compare it to your monthly debt payments when deciding how much you can borrow. Your credit score will influence the interest rate a lender offers you. 

How to Finance Home Renovations: Equity vs. Non-Equity Loans

When you finance a home renovation, you can choose between a loan that taps into your home's equity and puts your house up as collateral, or a loan that doesn't use your home equity. Examples of financing that use your home's equity include a cash-out refinance, home equity loan, and home equity line of credit (HELOC).

A HELOC is a type of revolving loan, meaning you can borrow and repay it over the course of several months. It can be a good option if you have several small projects to complete. Meanwhile, a home equity loan is a lump-sum installment loan that can be ideal for larger projects or an up-front payment. A cash-out refinance can also be a good choice for larger projects.

If you don't yet have much equity in your home, a non-equity financing option, such as a personal loan or credit card, may be your best choice. Personal loans and credit cards usually have a quicker application process, meaning you get the money you need for your remodel sooner.

Choose the Financing Option That's Right for You

When weighing your financing options, consider the following to decide which one is right for you:

• The cost of your project

• The payment schedule for your project

• How long you've owned your home and your current equity

• Your credit history

• Your existing debt