How to Pay for Home Renovations: Pros and Cons to Different Methods

Posted on January 24th, 2019
How to Pay for Home Renovations: Pros and Cons to Different Methods

Most homes require work, even newer ones. And just about everyone knows that home renovation projects aren’t cheap.

This is generally the case regardless of whether the job is a small one or a large one.

It’s going to cost you some real money, especially if you’ve got plans to update a kitchen or bathroom, replace a leaky roof, and so on.

Let’s talk about the many ways you can pay for it all, and which might be best depending on the situation.

Options to Pay for Home Improvements

MethodCostProsCons
Credit CardZero if you use a 0% APR credit cardPotentially very cheap, easy to apply and useHard to pay contractors, costly if you don’t pay on time
Project LoanInterest rates in mid to high single-digits, e.g. 7.99% APRRelatively low APR, fixed monthly payments, flexible use of fundsMay be stuck working with one company
HELOCInterest rate around 5% depending on prime rate and lenderPretty cheap, can draw if/when needed, tax deductibleNeed to apply for a loan, uses your home equity, rate is adjustable
Home Equity LoanInterest rate slightly higher than HELOC in most casesGet one lump sum, can use proceeds as you wish, tax deductibleNot as cheap as HELOC, have to apply for loan, uses home equity
Cash Out RefinancePrevailing mortgage rate, potentially 4% range or lower if you choose an ARMCan be cheap, especially if refinancing a high-rate loan, cash for any purpose, tax deductibleHave to apply for a mortgage, rate could be higher, restart clock on mortgage payoff
Standard RefinancePotentially zero and lower monthly payments on existing loanUse monthly savings to fund renovations, good deal if rate on existing mortgage is highHave to apply for mortgage, rates need to be lower to benefit
Renovation LoanTypical mortgage rates, maybe a bit higherCan get a purchase and renovation loan in one, can be cheap, tax deductibleLots of paperwork, limitations, lender has to approve everything
Personal LoanRates generally higher than mortgage and home equity ratesFixed payments, potentially no fees, not tied to your collateralMore expensive, loan amounts may be limited
CashCheapest option on paperCan buy/pay anyone, no limitations or costsYour cash might be better served elsewhere like in retirement account
Buy a FlipCost of home will likely be more expensiveProperty is turnkey, you don’t have to lift a fingerYou pay for the convenience, all improvements may not suit your taste
DIYFree other than cost of materialsDo things exactly as you wish, pride of ownership, no surprisesTime-consuming, may run into problems, lot of work

Credit Cards

I’ve mentioned this method before as an option if the cost of renovations is manageable. Some won’t like it simply because credit cards are often regarded as the root of all evil.

Today's Rates

But if you’re responsible and have excellent credit, there are amazing deals you can take advantage of that offer 0% APR for extended periods of time.

For example, if a credit card comes with 0% APR for 24 months and you borrow say $10,000 for renovation costs, you can slowly pay it back entirely interest-free at around $400 per month.

The obvious downside here is if you don’t pay it back in full, you are then subject to costly finance charges.

Credit card APRs are typically in the high teens or 20%+ range, so clearly if you aren’t getting promotional APR, the cost of credit is terrible.

Project Loans

Similar to credit cards are project loans, such as the ones offered by mega-retailers Home Depot and Lowe’s.

Both companies offer project financing that is intended to cover all costs of product purchases and installation for things like bath and kitchen remodels, additions, roof replacement, and more.

They come with fixed monthly payments so there’s no worry of the interest rate spiraling out of control.

However, they are typically limited to just one retailer, so if you need an outside contractor, or need products from other companies, you might be out of luck.

The interest rates can be pretty competitive relative to home equity products, and generally a lot better than regular credit card APRs.

Of course, you could argue to just use the 0% APR instead if the project isn’t too big.

Home Equity Line of Credit (HELOC)

This is a go-to for homeowners looking to make repairs or improvements to their existing homes, but there are some downsides to consider.

For one, the interest rate is adjustable, tied to the prime rate, which was risen quite a bit recently.

The other issue is that HELOC interest rates are typically higher than first mortgage rates. So it’s not the cheapest way to borrow.

You also have to apply for one and while not as tough as a traditional mortgage, it won’t be nearly as easy as getting approved for a credit card.

The upside is that the credit line is completely flexible, and you can borrow on it like a credit card, pay it back whenever, and leave it untouched if need be.

You may also get a tax deduction if the proceeds are used to improve your home.

Home Equity Loan

These loans are pretty similar to HELOCs, the difference being that you’re borrowing a set amount from the lender, instead of simply receiving a credit line.

That means you’ll pay interest on the full amount until it’s paid back. Of course, if you borrow more than you need you can pay it back sooner.

Additionally, the interest rate is fixed, which while a plus relative to an adjustable HELOC, typically means the interest rate will be higher.

Again, a tax deduction is a possibility to cut the cost.

Cash Out Refinance

Another common way to pay for home renovations is to take cash out of your property by tapping into the available home equity.

This is similar to a home equity loan/line, except you’re refinancing your first mortgage and replacing it with a new, larger one.

So if your outstanding loan balance is $250,000, and you need $50,000 for a project or two, you get a new loan for $300,000.

This can be a great method to get the financing you need for home improvements if mortgage rates are favorable.

For example, if your existing interest rate is 6%, and current rates are closer to 4.5%, it may be possible to get the cash you need and see your monthly mortgage payment barely budge.

That’s the ideal scenario, but in many cases you might be taking on a higher interest rate and monthly payment while restarting the clock on mortgage payoff.

Standard Refinance

This is a little outside the box, but it might be possible to execute a standard rate and term refinance where no cash is pulled out, and still free up money for renovations.

In other words, if you can refinance to a lower interest rate and/or refinance and drop mortgage insurance, the savings could be used to renovations.

Imagine if you’re able to lower monthly payments by $300-400 a month. You’ve now got extra cash on hand to fund the remodeling job you’ve been wanting to do.

Renovation Loans

You could also look into a renovation loan, such as the FHA 203k, HomeStyle Renovation loan from Fannie Mae, or the Renovation Mortgage from Freddie Mac.

While these types of loans do come with refinance options, they also allow borrowers to get a purchase loan and renovation loan in one shot, making life easier for those in need of renovations or repairs.

Lenders will even let borrowers get funds based on the “as-completed” home price factoring in the proposed improvements.

The downside to these programs is that there are lots of restrictions, paperwork, and the lender basically has a say in everything that goes on. You also need to apply for a mortgage.

Personal Loans

Another option is to take out a personal loan. Lenders seem to be pitching these a lot these days, perhaps because they can offer more attractive terms (for themselves).

While you might be able to get the home renovation funds you need without going through what can be a complicated home loan process, you’ll likely pay for the convenience.

These types of loans are notoriously expensive relative to mortgage-related options.

Some pros include fixed payments and no fees, and arguably that you’re not putting your house at risk by using the collateral because it’s an unsecured loan.

However, the interest rate will likely be higher than other options, and the loan amount may also be limited.

Cash Savings

You could just keep things simple and use cash from your checking or savings account, assuming you’re one of the Americans that actually has some.

It might also be possible to use a windfall such as a year-end bonus, tax refund, or inheritance to pay for home renovations.

The upside here is that there is no loan, no interest, and no hoops to jump through or any applications to fill out.

You simply pay cash and buy whatever you want, and use whichever contractor you choose.

The potential downside is you might burn through your safety net in the process. That cash might also be better served in a retirement account.

And using your home’s collateral for improvements means less of your money is at risk – you’re basically playing with the lender’s cash.

Buy a Flip

Another alternative is to simply by a house that is completely renovated. Instead of having to put in the work yourself and live in a construction site, just buy a turnkey property.

The upside is no additional costs, no annoying noise and mess, and it’s ready to go immediately.

The clear negative here is that the property will be more expensive, all else being equal. And possibly unaffordable if your purchasing power is limited.

Additionally, I always find that flips have hidden issues and/or don’t necessarily suit all tastes.

They are often also located in less-than-desirable locations, which is why they look so good to begin with.

It’s hard to find something that is exactly what you want and there’s a good chance you’ll want to make changes regardless.

Do It Yourself (DIY)

Lastly, if you’re handy, you can just do the stuff yourself a save a lot of money.

While you’ll still need to pay for the costs of materials, it is the installation that is often the most expensive piece depending on the job at hand.

It can pay to learn how to do things yourself, and the internet has made it easier than ever to complete a variety of tasks without the help of a professional.

Of course, be sure not to get in over your head, especially if it involves potentially dangerous stuff like plumbing or electrical work.

Sometimes it’s better just to leave it to the pros…

Renovate Smartly

Whichever method you choose, be smart about how you approach it.

Like you would a mortgage, comparison shop among vendors and contractors to ensure you get the best price.

You’d be shocked at how much prices can vary for the same job/work.

The cost of materials, such as a slab or quartz, can also be negotiated, especially at smaller, non-corporate shops.

Also consider what you actually need to renovate.

It might be possible to cut corners in a bathroom or a kitchen and replace only certain fixtures, or simply freshen things up by painting and/or replacing knobs and faucets.

If you plan to sell at some point in the relatively near future, also consider how any changes will impact the marketability of your home. Try to stick to things that will increase your property value.

(photo: Marco Verch)

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