Are you wanting to renovate your home but don’t have the cash on hand? You may be considering loan options, but with so many to choose from, you aren’t sure which is best. Or maybe you’re torn between borrowing the funds you need or delaying home improvements until you can save up enough cash.
Either way, you’ll learn when it makes sense to finance home renovations and how the different financing options work in this guide so you can make an informed decision.
Home Renovation Loans
Should You Finance Your Home Renovations?
What’s the current condition of your home? Is it in dire need of upgrades to make it safer or more comfortable for your family? Are the home improvement projects so large in scope that it would take several years to save up enough to have them done? Has your family outgrown the space and a renovation is desperately needed to prevent a move?
If you answered yes to any of these questions, financing your home renovations could be a wise financial decision. Furthermore, you won’t have to exhaust your emergency fund or dip into your retirement savings to make your home suitable for you.
How to Pay for Home Renovations
Depending on your financial situation and credit health, you may have more than a handful of financing options to consider. But you should be mindful of several factors as you sift through your choices. These include the desired loan amount, term and monthly payment, your home’s projected after-renovation value and the amount of equity (if any) you have in your home.
Savings or Credit Card
If you have a sizable amount of cash lying around, feel free to use it to cover the cost of home renovations. The reality is this option isn’t feasible for most. In turn, they resort to borrowing from friends and relatives, taking withdrawals from their retirement accounts or even worse, emptying out their emergency fund. Others bury themselves in credit card debt and spend a fortune in interest repaying what they owe.
RenoFi Loan for Home Renovations
Instead of tapping into your savings or relying on a high-interest credit card, consider a RenoFi Loan to cover the cost of your home renovations. You can borrow up to 90 percent of your home’s after-renovation value, which means you can get the cash you need even if you don’t have much equity built up.
RenoFi partners with credit unions to offer the following loan products:
- RenoFi Home Equity Loan: This is a fixed or variable rate loan between $25,000 and $500,000 with a draw period of up to 10 years, followed by a repayment period of up to 20 years. You can borrow up to 90 percent of your home’s after-renovation value.
- RenoFi Refi: This is a fixed-rate loan of up to $2,000,000 that lets you tap into up to 80 percent of your home’s after-renovation value. You’ll get a lump sum of funds at closing that’s repayable for a term of up to 30 years.
There are no draws or inspections, and you won’t have to get your contractor involved. Even better, you could get a competitive interest rate and a loan term of up to 30 years without refinancing your current mortgage.
Home Renovation Loans
A cash-out refinance lets you convert a portion of your equity, typically up to 80 percent, into cash and refinance your current mortgage. To illustrate, if your home is worth $350,000 and you owe $215,000 on the mortgage, you could qualify for up to $65,000 ($350,000 * .80 – $215,000). The lender will disburse the $65,000 to you at closing and pay off your current loan. You’ll get a loan with new terms for $350,000 and make payments to your new lender.
While you could get access to a large amount of cash, the downside is you could get a higher interest rate on your mortgage. Plus, your new mortgage payment could be on the high end and stretch your budget way too thin.
Home Equity Loan or HELOC
A home equity loan acts as a second mortgage and lets you borrow a percentage of your equity. However, a home equity line of credit (HELOC) gets you access to a pool of funds that you can borrow from on an as-needed basis during the draw period.
These loan products are only ideal if you have a large amount of equity in your home. Still, you could lose your home if you default on the loan payments.
FHA 203k Rehab Loans are government-backed (by the Federal Housing Administration) and allow you to borrow up to 96.5 percent of a home’s after-renovation value, capped at FHA loan limits.
Borrowers use these loans to purchase or refinance properties, but you must work with an approved FHA lender. Furthermore, they call for a substantial amount of paperwork and contractor involvement. Delays are also common with FHA 203k Loans. Interest rates are relatively high, and you’ll pay mortgage insurance for the life of the loan.
Unless you’re seeking a small loan amount, personal loans should be avoided. They’re typically unsecured and don’t require collateral to get approved, so your home won’t be at risk of foreclosure. However, most come with short repayment periods that often result in steep monthly payments. And you’ll need good or excellent credit to qualify for a loan with a low interest rate.
How to Pay for Home Renovations: The Bottom Line
Ultimately, deciding how to pay for home renovations is a personal decision. If you’ve saved up a hefty sum of cash, you can move forward without worrying about monthly payments. But if you need to finance home renovations, carefully weigh the pros and cons of each option.
Also, consider a RenoFi loan to get the funds you need for home renovations, minus the hassle. Use the loan calculator to see how much borrowing power you can unlock. It’s quick, simple and won’t impact your credit score.