2. Home Equity Line of Credit (HELOC)
Like a home equity loan, a HELOC uses your home as collateral and usually lets you borrow up to 85% of your home’s equity. As you pay down the amount, typically you can take additional draws over a specified period. The interest rate can be fixed or variable.
3. Cash-Out Refinancing
Cash-out refinancing replaces your existing mortgage with a new mortgage for a higher amount. The financing amount you receive for your renovation project is the difference between the two and is paid out as a lump sum. The maximum amount you can add to your existing mortgage is typically 80% of the home’s current value. The interest rate is fixed.
These funding sources also can help you get your renovation job done.
4. Savings
Using money from a savings account or brokerage account is the easiest option. Be mindful of your financial institution’s rules on withdrawals and any minimum balances needed to avoid fees. Note that if you draw from a retirement plan to pay for renovations and are younger than 59½, you’ll likely have to pay a 10% early-withdrawal fee as well as taxes on the amount.
5. Credit Cards
Charging remodeling costs to a credit card is convenient, and the payouts are instant. However, interest rates on charges carried past the due date often are steep and variable. One strategy is to get a credit card with a 0% APR period and pay the entire amount due before that period ends, typically 12 to 21 months.
6. Contractor Financing
Some home improvement contractors offer loans directly, usually through a third-party lender. The contractor submits the loan application, and a decision can be made quickly. The loan amounts can be in the six figures and are paid as a lump sum. Some loans are offered at no interest if they’re paid back within an introductory period. The interest rate can be fixed or variable.
7. Personal Loan From a Financial InstitutionPersonal loans from financial institutions are unsecured, so you won’t be putting your home at risk. Funding, which is paid as a lump sum, can be available in as little as a week. The amount tends to be smaller than with equity-based loans, and the interest rate is usually higher. The interest rate can be fixed or variable.
8. Personal Loan From a Relative or Friend
This type of loan can be easier and less costly than going through a financial institution, as the paperwork, any interest and repayment terms are discretionary. It’s advisable to have a written contract so there are no misunderstandings. And note that there can be emotional costs to being indebted to a friend or relative.
The Federal Housing Administration backs several home renovation loan options offered through private lenders.If your renovation goal is to make your home more livable, useful, accessible or energy-efficient, you might qualify for a Title 1 fixed-rate loan. The maximum loan amount for a single-family home is $25,000, and amounts less than $7,500 are usually unsecured. The payout is a lump sum, and the interest rate is fixed.
If you need to borrow more than $25,000, you might qualify for a 203(k) loan (for major work). This combines a renovation loan with a mortgage. A portion of the loan goes toward purchasing the home, and the rest is paid to the contractor as needed. The interest rate can be fixed or variable.
10. Fannie Mae and Freddie Mac Loans
Fannie Mae and Freddie Mac are government-sponsored enterprises that have a hand in some renovation loans. One is the HomeStyle Renovation Loan (Fannie Mae), for a wide range of home improvements. Another is the ChoiceRenovation Loan (Freddie Mac), for more limited types of renovations, such as increasing energy efficiency. These loans combine the renovation cost and the home cost into a single mortgage, with a maximum loan amount of 75% of the projected value of the home when the work is finished. Funds are released to the contractor. The interest rate can be fixed or variable.
Equity-Based Financing Options
If you made a big down payment on your home, paid for it outright or have lived in your home long enough for there to be a substantial difference between your home’s market value and the amount you still owe on your mortgage, you can borrow against that home equity. There are three types of renovation financing based on equity.
1. Home Equity Loan
Sometimes called a second mortgage, a home equity loan uses your home as collateral and usually allows you to borrow 80% to 85% or more of your equity, distributed as a lump sum. So, for example, if you bought your home for $500,000, have $200,000 left on your mortgage and borrow 80% of your equity, your loan would be $240,000. The interest rate is fixed.