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Comparing Options For Financing Home Renovations

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Updated November 15, 2023​

8 min. read​

You want to improve your living space but aren’t quite sure how you’ll afford the renovations. If this is a pressing item on your to-do list, you don’t have to wait several months or years until you’ve saved up enough money to cover the costs. Instead, you can finance the upgrades and bring your remodeling visions to life sooner rather than later. 

There are several options to choose from, so it’s vital that you research and compare what’s available to you to make an informed decision. Here’s what to know about renovation financing and how to compare your options to find the best fit for your financial situation. 

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Why It’s Crucial to Plan Your Renovation Financing

With so many renovation options to choose from, it’s easy to pick the first one you find to move the process forward sooner rather than later. However, adopting this approach could prove to be more of a headache over time, and you could end up with much steeper bargain costs than expected. 

A better idea: develop a plan to finance your renovations and do the legwork so you’ll know what to expect upfront. 

Start by assessing your current spending plan to gauge how much you can comfortably afford to allocate each month to home renovation financing payments. This figure will be particularly useful when it’s time to start shopping around for funding and compare offers, as you’ll know how big of a renovation you can afford to pull off. You’ll also know if you need to make adjustments so the financing payments don’t stretch your budget too thin. 

Next, come up with a budget for your home improvement project. Again, doing so helps you understand what you can comfortably afford and prevents you from overspending. You will also get the benefit of knowing what’s practical for your financial situation so you can set realistic expectations for the outcome of the project. Be sure to research the cost of materials, labor, and permits required, then add a contingency fund for any unexpected expenses before mapping out your plan. 

Also, be mindful of potential hidden costs that may not be included in your initial estimates. For example, you may need to make temporary living arrangements if your renovation requires significant work on your primary living space. These additional costs should be accounted for in your budget.

Once you’ve done so, it’s time to begin exploring the different ways to make your home renovation dreams a reality. As mentioned above, there are several options to choose from. These include credit cards, cash-out refinance loans, home equity loans, construction loans and Federal Housing Administration (FHA) 203k loans. That said, the form of financing that’s best for you will depend on your unique financial situation. More on this shortly. 

The Costs Involved in Home Renovations

Before diving into the ways to cover home renovation costs, here’s a closer look at the costs you can expect to incur throughout the process. 

Assessing the Costs of Your Renovation

Before jumping into your home renovation project, it’s essential to assess the costs involved. Depending on the size and scope of your renovation, According to, the costs can range from $25,000 to $75,000 or more, depending on the size and scope of your project. Hence, it is important to get estimates from at least three contractors and compare your options to decide which is best. As mentioned above, be sure to factor in unexpected expenses, such as permits, inspections and contingency funds for unforeseen issues.

Allocating Funds and Setting Priorities

When ironing out project details and assessing renovation costs, it’s vital to prioritize your projects based on your goals and budget. Identify the most important aspects of your renovation, whether it’s updating an outdated kitchen or repairing a damaged roof, and allocate your funds accordingly. Be realistic about your expectations and consider scaling back on less critical projects if necessary to stay within your budget. You can always return to the drawing board later, assuming you plan to stay in your home for some time. 

How to Budget for Home Renovations

If you want a detailed, step-by-step plan to devise a home renovation budget, here’s a useful strategy to adopt: 

  • Step 1: Start with a clear vision. Outline the scope and desired outcome of your project to avoid mid-project changes, which can inflate costs.
  • Step 2: Get multiple quotes. Obtain at least three estimates from reputable contractors to ensure you’re getting the most competitive pricing for the work.
  • Step 3: Account for hidden costs. Don’t forget indirect costs such as permitting fees, inspections, and possible cost overruns that result from underestimating expenses, labor or missing deadlines. 
  • Step 4: Track your spending. Monitor your expenses regularly and make any necessary adjustments to keep your project within budget.

By following this framework, you’ll be well on your way to planning and executing a successful home renovation that fits within your financial means.

Ways of Financing Home Renovations

Below is a closer look at the ways in which you can finance home renovations without breaking the bank. 

Using Your Savings

This strategy technically isn’t a form of financing. Still, it’s worth mentioning as it could help you reduce borrowing costs even if you have some of your personal funds to spare. And, of course, it doesn’t require any additional paperwork or application processes, and you won’t need to pay any interest. However, it’s best to have a clear understanding of how much the project will cost and whether it’s within your financial means before dipping into your savings.

Credit Cards

You can use your credit cards to pay for the renovation expenses, but proceed with caution. This option is best for smaller-scale projects since credit cards generally have higher interest rates than many other forms of financing. So, using a credit card to cover costs could leave you with several thousand in borrowing costs, and it could take several years to repay the balance. So, always be mindful of your credit limit and the potential long-term impact on your financial health.

Line of Credit

A line of credit gives you access to a preset pool of money. You can borrow as much or as little as you need and only pay interest on the amount used. And like a credit card, the credit line will replenish as you make payments. Some lines of credit also come with interest-only payments during the draw period or time frame during which you can make withdrawals. 

To finance home renovations, consider opening a home equity line of credit (HELOC), which often comes with a competitive interest rate and allows you to borrow against your home equity. Keep in mind that the interest rate is generally variable, so the monthly payments will fluctuate over time. 

Cash-Out Refinance

Cash-out refinancing involves replacing your current mortgage with a new one for a higher amount. Doing so allows you to obtain the difference between the old and new mortgages in cash, and you can use the cash to fund your home renovation project. Keep in mind that this method involves refinancing costs and a possible change in your mortgage interest rate.

Home Equity Loans

A home equity loan is an installment loan that allows you to borrow a lump sum against your home equity. This method often comes with a fixed interest rate and repayment period, so you’ll get equal monthly installment payments over time. It’s a good option for financing significant home renovations as it tends to offer lower interest rates than credit cards or unsecured personal loans.

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Construction Loans

Construction loans are short-term loans designed to fund the costs of constructing a new home or remodeling an existing one. They operate differently than traditional mortgage loans, as the lender provides the funds in installments during the project’s various stages. Once the project is completed, you will typically refinance the construction loan into a permanent mortgage.

Renovation Loans (FHA 203k)

The FHA 203(k) loan is a government-backed renovation loan that combines the cost of purchasing a home with the cost of its renovation. This type of loan, which the Federal Housing Administration insures, is suitable for those looking to buy a fixer-upper or who want to make significant renovations to their existing home. Having a single loan simplifies the financing process and often offers favorable terms.

Comparing Options For Financing Home Renovations

Now that you’re aware of the most common home renovation financing options, here are some factors to consider when comparing your options. 

Looking at Your Eligibility

Before applying for any home renovation financing options, check your eligibility. Different lenders have specific credit scores, debt-to-income (DTI) ratios, and employment history guidelines you must adhere to be eligible for a loan. If you’re seeking a home equity lending product, you’ll also need to have a certain amount of equity in your home. It’s worth calling the lender and inquiring about lending requirements to narrow down your list of top options. 

Understanding Interest Rates

Interest rates are another critical factor to consider when choosing a financing option for home renovations. The lower the interest rate, the less you will pay overall. Remember that rates can be fixed or variable, so consider this when comparing choices. If you don’t mind a fluctuating monthly payment, the latter could be ideal if it means securing a lower interest rate in the short term. Otherwise, stick with loan products that come with fixed interest rates. 

Assessing Repayment Options

Repayment options differ from one lender to another and among various types of loans. Factors to consider include:

  • Loan term: How many months or years do you have to repay the amount you borrow? 
  • Monthly payments: How much do you need to pay each month, and can you afford it? 
  • Prepayment penalties: Are there fees if you choose to pay the loan off early? 

Choose a repayment option that won’t strain your budget or overall financial health. 

Weighing Out the Pros and Cons

Each financing option has benefits and drawbacks. For instance, using home equity for renovations may offer tax benefits, but it also puts your home at risk of foreclosure if you fall behind on payments. On the other hand, personal loans do not require collateral but likely have higher interest rates due to the elevated risk that the lender assumes.

Determining the Suitability of Each Financing Option

You also need to evaluate each financing option based on your needs and circumstances. Consider factors such as the amount of equity in your home, the extent of the renovation, the loan amount and your risk tolerance. Weigh these factors against the interest rate, repayment terms and other factors discussed here. 

Evaluating the Lender

Most importantly, explore various lenders to find the one that offers the best financing terms for your specific needs. It’s equally important to dig a bit deeper to determine what past and current customers have to say. So, it’s best to review lender ratings, customer reviews and loan terms before making a final decision.

Financing Home Renovations: Which Option is Right for You?

Ultimately, there’s no one-size-fits-all approach to financing home renovations. The right choice will depend on your financial situation, preferences and unique goals. To help you decide, here’s an overview of key factors to consider before moving forward: 

  • Savings: Again, this isn’t a form of financing, but it’s worth mentioning here. A lump sum payment can be a good option if you have saved up enough cash to cover the entire cost of your home renovation. By using your savings, you avoid the need to take on any debt or pay interest. However, this option also requires careful planning and budgeting, as you’ll need to ensure you have enough funds to complete your project without depleting your savings.
  • Credit card: Unless you get a 0% APR credit card, this form of financing should only be used as a last resort. Otherwise, expect exorbitant borrowing costs. 
  • Line of credit: This option allows you to draw funds as needed during your renovation, which can be especially helpful for large or ongoing projects. However, it’s important to keep in mind that HELOCs typically have variable interest rates, making it harder to predict your monthly payments. So, it may not work for you if you prefer predictability. 
  • Cash-out refinance: This option can be ideal if you have significant equity in your home and want to potentially secure a lower interest rate. Just be mindful that refinancing typically involves closing costs, and your entire property is used as collateral for the loan.
  • Home equity loan: If you’d prefer to access your home equity without refinancing, consider a home equity loan. Like a HELOC, it determines your loan amount and the amount of equity in your home. But you’ll get a fixed interest rate and equal monthly installment payments over a set term. 
  • Construction loan: These loans work for more significant renovation projects. They involve several hoops you must jump through, though, so inquire with the lender before applying so you’ll know what to expect. 
  • FHA 203(k) renovation loan: This loan comes with specific requirements and restrictions on the types of improvements you can make, so it’s vital to ensure your project meets the criteria before applying. If so, the perks it offers could make it a valuable option. 

Remember, it’s up to you to choose the best fit. Keep in mind, though, that although you’ll incur borrowing costs, the benefit of possibly improving your property’s value could make the investment well worth it. 

Access Your Home Equity for Home Renovations

Do you need to access the equity in your home for renovations? Consider Top Flite Financial, an industry leader for credit-challenged homeowners. Top Flite considers applicants that traditional banks and credit unions may have turned down, even if you have a low credit score. Cash-out refinance from Top Flite Financial allows you to take advantage of the equity in your home and convert it into cash. Submit a few answers on the questionnaire online to contact a mortgage refinance expert from the Top Flite Financial team to review your options.

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