Other ways to pay for home renovations
Getting a personal loan for home renovations isn’t the only way to cover this big expense. If a personal loan isn’t what you had in mind for your home improvement needs, explore the other options on the table.
A credit card might be the most accessible way to pay for your home renovations. This is especially true if you already have a credit card in your wallet with a high enough limit. You will not need to complete another loan application. Instead, you can start covering costs with your plastic right away.
But there’s a big downside to using your credit card for a home improvement loan. It’s the high interest rates associated with credit cards. That higher interest rate can mean paying a lot more in finance charges for the same home improvements.
If you need to jump-start the home improvement process right away, consider credit cards as a temporary solution. But look for a more permanent option in the form of a lower interest rate loan.
Home Equity Loan
A home equity loan is essentially a second mortgage based on the equity you have accumulated in your home. Equity is the difference between the current value of your home and the outstanding balance of your mortgage. So if you own a $250,000 home and still owe $100,000 on the mortgage, then you will have $150,000 in home equity.
You cannot borrow all the capital you have built up in a house. But depending on your situation, you could tap into a relatively large loan amount. After receiving the lump sum loan amount, you will make regular monthly payments for a set number of years.
If you default on the loan, the lender has the right to foreclose on the home. For homeowners who can commit to another mortgage payment and want to make lots of upgrades, a home equity loan might be a good choice.
Home Equity Lines of Credit (HELOC)
Like a home equity loan, a home equity line of credit (HELOC) is based on the equity you have accumulated in your home. But unlike a home equity loan, a HELOC is a revolving line of credit that you can draw on as needed.
When using a HELOC, the loan details will look more like a credit card. This is because you can withdraw funds when you need them throughout the draw period. However, you will still need to make regular monthly payments to pay off this balance. And don’t forget that this monthly payment is in addition to your current mortgage payment.
If you’re not sure how much your home renovations will cost, this type of financing gives you the flexibility you need to cover the costs. But you will use your home as collateral for this line of credit. With this, the lender can seize your home if you are behind on your payments.
Refinancing by withdrawal
A cash refinance allows you to take out a new mortgage with different loan terms. If you have built up equity in your home, this type of loan allows you to withdraw a lump sum.
Of the financing options on this list, you’ll likely get the lowest possible interest rate with a cash refinance. But make sure you can get an interest rate lower than your current mortgage rate before you jump in.
You will need to know the cost of your home improvement project before finalizing your cash refinance. Otherwise, you risk not getting enough to complete the project. You will not be able to withdraw the necessary funds with this financing solution.
Plus, you’ll have significant upfront costs with a cash refinance. Essentially, any closing costs you paid for your original mortgage will have to be paid again for your new loan. Typically, closing costs run into the thousands of dollars. Take the time to crunch the numbers before you go ahead with a cash-out refinance.