Here's the #1 Best Way to Finance a Home Improvement Project
Americans are staying in their homes longer, and as both houses and stylistic preferences age and change, more and more people are shelling out big money for remodels, renovations, and large-scale repairs.
Yet even as reports by the Home Improvement Research Institute point to meteoric spending over the course of the last few years, many homeowners are still putting off home improvements because their passion project or maintenance effort is simply too expensive.
If you’re one of the many who’ve pushed off that long-desired pool build or spent one too many days daydreaming of a more modern kitchen, the good news is that you don’t have to wait until you’ve saved thousands of dollars in cash to finance your upgrade.
There are a handful of excellent ways to fund the changes to your living space, but it’s essential to understand that the best way to finance a home improvement project varies depending on the nature of your project and your own independent financial situation.
Explore the options we’ve outlined below to weigh up the pros and cons of everything from personal loans to cash-out refinances.
Are Home Improvement Loans a Good Idea
One way to decide if a particular home improvement is worth it is to use a calculator to compare the cost to the value of remodels. Some projects, like a minor kitchen remodel that includes updating cabinets and appliances, recoup more than three-quarters of their value; while others, like the addition of a bathroom, won’t translate as well to dollar signs in the event that you sell your home.
Of course, not every home improvement is about making a pretty penny in today’s real estate market; often people renovate or remodel to make a house better fit their needs or simply because they’re interested in reimagining the space they’ve spent so much of their time in.
In this case, it’s vital to first and foremost understand how much your particular passion project will cost. An easy way to achieve this is to research the average price of common repair or remodel efforts; similarly, it’s always a good idea to reach out to potential contractors for estimates (taking care to compare costs across service providers).
Once you have this information, you can start to investigate home improvement financing options to see which loan type is best for you based on the amount you need, the accompanying rate, and the related terms.
4 of the Best Home Improvement Financing & Remodeling Loan Options
1. Personal Loan
For those with no equity in their home, a personal loan1 is one of the best ways to finance a home improvement project. That’s because it doesn’t require you to hold any value in your property, and it can be used for anything you want.
What’s more, this kind of loan is unsecured, which means that it’s not linked to any collateral, like a house. This is a good thing if you default on your loan, as you won’t lose your home. On the flip side, it means that the lenders providing personal loans tend to have strict qualifying requirements and also institute slightly higher interest rates than those offering secured loans.
Finally, thanks to the advent of online lenders, like Eloan, it’s fast and easy to not only apply for a personal loan (check your rates in minutes1), but also to receive the money in your account if you get approved (as fast as the next business day).
- Typical Loan Range: $3000 - $35,000
- Average Interest Rate (24-month personal loan in 2018) : 10.32
- Repayment Terms: Fixed monthly payments over a term that usually spans 18 months to 5 years
2. Home Equity Loan
If you do happen to own your home and have spent some time paying off your mortgage, you may be able to leverage your equity to get a loan for the money you need to make your happy place even happier.
A home equity loan is a loan that’s secured by your house and that allows you to tap into a portion of your equity, which is the difference between what your house could sell for and what remains on your mortgage. This portion is typically 80 to 85 percent of your total equity.
These loans can give you access to larger amounts of money, and as they’re secured loans, they tend to come with lower interest rates than unsecured loans, like personal loans. The drawback, however, is that if you default on your loan then you risk losing your home.
It’s also important to know that there tend to be additional fees, like appraisal fees, attached to these loans — not to mention, the application and approval process tend to be lengthier and more complicated than other options. And finally, don’t forget that on top of paying off your home equity loan, you’ll still need to continue to make your mortgage payments.
- Typical Loan Range: 80 to 85 percent of your home equity
- Average Interest Rate (5-year home equity loan in 2018) : 5.17
- Repayment Terms: Fixed monthly payments over a term that usually spans 5 to 30 years
3. Credit Card
Like personal loans, credit cards are another way to finance a home improvement project if you don’t hold any equity in your home. More specifically, they’re ideal for smaller projects that won’t cost you an arm and a leg — and they’re also a good option for people who want more flexibility in terms of repayment.
The other side of the coin, of course, is that credit cards come with significantly higher interest rates than any other financing avenue discussed on this page. So if can’t pay off the outstanding balance immediately or relatively quickly, then you risk piling on debt above and beyond your initial outlay for your project.
Furthermore, if you’re using a contractor or service provider who doesn’t accept credit card payment and you opt to do a cash advance, then you’ll likely also be responsible for additional processing fees and possibly an even higher interest rate.
Lastly, if you don’t already have a credit card, you’ll have to go through an application process and then wait for your card to arrive in the mail before you begin paying for your home improvements.
- Average Credit Card Limit (2019): ~$22,000
- Average Interest Rate (2018) : 14.22
- Repayment Terms: Monthly minimum payments or variable amount of your choosing until the balance is paid off
4. Mortgage Cash-out Refinance
A cash-out refinance loan, like a home equity loan, allows you to access the equity in your house in liquid form. Rather than acting as a separate loan apart from your mortgage, however, this type of financing option works by having you replace your existing mortgage with a new one at a larger amount, part of which is paid out to you in cash for your own use (generally, the maximum you can get is usually around 80 percent of your loan-to-value ratio).
Also similar to a home equity loan, this can be a great avenue to explore if you want to fund an expensive home improvement, and like its counterpart, it’s also a secured loan that tends to come with lower interest rates than unsecured loan.
On that note, though, it’s essential to carefully consider whether a cash-out refinance is right for you. After all, you’re not just taking out a new loan, you’re replacing your mortgage, which means you need to carefully consider how new interest rates will compare with your current mortgage interest rates. What’s more, as was the case with your initial mortgage, you should anticipate paying additional fees, like appraisal costs and closing costs.
The bottom line? If you can lower the interest rate on your mortgage while going through this process, a cash-out refinance loan can be a great way to simultaneously access funds for home improvements. If you can’t, then you’re likely better off considering a home equity loan.
- Typical Loan Range: 75 to 80 percent of your home equity
- Average Interest Rate (30-year fixed rate in 2018) : 4.54
- Repayment Terms: Fixed or adjustable rate monthly payments over a term that usually spans 15 to 30 years
1Subject to credit approval. Certain restrictions apply. Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances. The information contained herein is for general informational and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. The information or opinions contained herein should not be construed by any consumer and/or prospective client as an offer to sell or the solicitation of an offer to buy any particular product or service.