Planning a home renovation? Certain home improvements can add significant value to your home, but the cost of these projects can often be out of reach for homeowners.
It’s possible to borrow money to renovate your home, and you have many options at your disposal. Here are some of the most common ways to fund home improvement projects.
Refinancing your home can help lower your rate and your monthly payments. It can also free up cash for your renovation project.
A cash-out refinance is another option to tap into your home’s equity. Lenders will usually allow you to borrow enough money to pay off your mortgage and take out cash – usually up to 80% of your home’s value.
Just keep in mind that with this type of refinancing, you’ll be using your home as collateral to take out a bigger loan. Typically, cash-out refinancing is ideal for renovations that will increase your home’s value.
Personal loans are an alternative to using your home’s equity for financing. One of the benefits to choosing this type of loan is that you don’t necessarily have to use your home as security. In fact, you may not have to put up any assets for collateral.
But to get the best rate, you’ll need to have good or excellent credit.
Interest rates are generally higher with personal loans compared to home equity financing, and you have a shorter timeframe to pay back the funds (usually 5-7 years). A shorter repayment term may mean that your monthly payments are higher than with other loan options.
Personal loans are a good option if you don’t have much equity in your home or you would prefer to have a shorter repayment period.
According to Maxiron Capital, a second mortgage may be an effective option if there are no other alternative unsecured funding options.
Home equity lines of credit (HELOC) and home equity loans are both technically considered second mortgages. In most cases, you can take out a loan for up to 90% of the equity in your home. Just keep in mind that these loans come with a lien against your home. If you default on the loan, the bank can foreclose on the property.
With that said, there are some benefits to using your home as collateral. The primary benefit is having lower interest rates. Also, the interest you pay on your second mortgage also qualifies for a mortgage tax deduction.
If you don’t have the cash to pay for the renovation and loans are not an option, you can use your credit card. Some cards even offer rewards for every dollar spent. However, you’ll need to make sure that you’re able to pay off your balance relatively quickly. Credit cards have much higher interest rates compared to other types of financing.
Credit cards should be your last resort because of the high interest rates. It may be worth just waiting to save up the money and pay for the renovations in cash than to use a credit card.