How to Pay for Home Improvements
It’s usually best to use cash or savings when paying for home improvements — as long as it wouldn’t drain your emergency fund dry.
Unfortunately, this isn’t always possible, and to cover those repairs or updates, you might need to consider financing.
If you’re in this boat, it’s important to weigh your options carefully. Not all financing options are created equal, and some can cost you much more in the long run, too.
Do you need help paying for home improvements? Here are your choices — and how to choose the best one for your scenario.
A cash-out refinance allows you to access your home equity. You take out a mortgage loan that’s bigger than the balance on your current loan. Then, you get the difference between those balances back in cash. You can use those funds for your home improvements or any other costs you might be facing.
FHA 203(k) renovation loan
Instead of managing two different loans, you can finance the expense of home repairs or a remodel with an FHA 203(k) loan and refinance your mortgage in the process. FHA 203(k) loans can go as high as 110% of the after-improved value to pay for an assortment of projects.
Home equity loan
A home equity loan is a type of second mortgage. It lets you borrow from your home equity and use the cash for any purchase. Keep in mind that this does add a second monthly mortgage payment (unlike refinancing, which simply replaces your existing payment with a new one).
A HELOC, or home equity line of credit, is similar to a home equity loan, except it functions more like a credit card. Instead of a lump-sum payment, you have a line of credit you can pull from as you need the cash. You also typically don’t make monthly payments for the first 10 years or so of the loan (you only pay interest at that time). It’s important to note, however, that if you only pay the interest, you’ll likely have a balloon payment at the end of the 10-year period — a large, one-time payment at the completion of the loan term. HELOCs can also be risky because the home serves as collateral, so if a borrower cannot pay, they may lose their home.
If you’re 62 or older, you might consider a reverse mortgage. With these, the lender sends you either a lump-sum payment or monthly payments out of your equity. The loan gets repaid when you sell the home or pass away.
Credit cards are a pretty common financing source. In fact, according to a recent survey, 35% of homeowners say they plan to use a credit card when paying for home improvements.
Unfortunately, cards usually come with much higher interest costs than other options. According to the Federal Reserve, the average rate on credit cards right now is over 14%. Mortgage rates are averaging in the mid to upper 4% range, per Freddie Mac.