Home renovation costs are high, but there are ways to pay for important updates without diving into savings.

By Kristine Gill
November 01, 2019
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Say your hardwood floors needs sprucing up, or you’re ready to gut the 1950s bathroom you inherited with your fixer-upper. Whether you do the work yourself or hire a crew, major home renovation projects cost major money—those home remodeling costs aren’t cheap. You might think your only options are to save for a project or rack up debt for that emergency repair, but you’d be wrong. From credit cards to home renovation loans, financial experts weigh in on four common options for funding those home facelifts.

Mortgage refinancing

While it may seem like the most daunting option, refinancing your mortgage can ultimately be the most cost-effective way to fund a home renovation project if interest rates are lower than the existing interest rate on your mortgage.

“The approval process for a cash-out mortgage refinance is more complex than a HELOC [home equity line of credit], but the loan will have a set payment and a lower interest rate that can provide significant savings,” says Lauren Anastasio, a certified financial planner with SoFi.

The Figure Mortgage Refinance, for example, offers closing in 10 days and a dedicated support team to anyone considering a cash-out mortgage refinance. Plus, it takes just minutes to apply through the all-digital process, helping homeowners get their money fast.

Mortgage refinancing can be of particular use if your home has appreciated in value and interest rates have fallen since you purchased, Anastasio adds. And depending on your financial situation, you might quality for a competitive interest rate. Essentially, the cash-out mortgage refinance replaces your current home loan with a new one for a larger amount. The difference between your current mortgage and the new one is distributed to you as a cash loan, often with a low interest rate.

Since it can be a laborious option, homeowners should consider whether they’ll benefit from new mortgage terms, especially once they’ve paid new closing costs and fees in the refinancing, says Jon Giles, head of home equity lending at TD Bank.

“If a homeowner already has a low interest rate or would achieve minimal savings by refinancing, a home equity line of credit may be the more effective option,” Giles says. “Refinancing a mortgage or securing a large loan for renovations are significant financial decisions that are deeply dependent on borrowers’ personal situations. Homeowners should speak with a knowledgeable banker or financial advisor who will take the time to review their entire financial picture and ensure that the borrower understands and can manage the payments.”

Credit cards

Many of us automatically reach for our credit cards when contemplating a big expense we don’t have the cash for. And for many homeowners who are on top of their debts, that’s a solid option. But when it comes to home renovations that could cost thousands of dollars, you’ll want to carefully evaluate your decision.

“If you feel comfortable with the amount of debt you’re planning to take on with your purchases and have a plan to pay your monthly bills off, using a credit card could make sense,” Anastasio says. “That said, home renovation projects almost always have surprises—last minute changes, unforeseen problems, etc., that likely increase the total cost.”

Similarly, those unforeseen costs can quickly deplete your cash savings, Anastasio says.

Giles says that, during a recent poll, TD Bank learned that more than half of 800 homeowners polled said they planned to spend more than $25,000 on their home renovation. A third estimated they would spend more than $50,000. Do you really want to swipe for an amount like that?

“When determining the right option to finance a project, it's important homeowners have an understanding of the project budget, their future financial needs, and the responsibility to a lender,” Giles says.

Personal loans

If you have a fixed amount for your home renovation budget, and it’s relatively small, you might instead want to consider a personal loan.

“Personal loans are also quick to secure and require relatively little paperwork,” Anastasio says. “Personal loans offer you flexibility when it comes to deciding exactly what you want to do with your loan.”

If you’ve started pricing your renovation and predict that the dollar figure could increase over your initial estimates, Giles suggests skipping both the personal loan and credit card options.

“Once project costs increase, tapping your home equity may become advantageous due to the low interest rate,” he says.

Home equity

Home equity is the market value of your home minus what you still owe on your mortgage; the more you’ve paid toward your mortgage, the higher your equity will be, especially if market values are staying roughly the same. A major perk with home equity loans is that you can borrow against that amount you’ve paid anytime throughout the terms of the mortgage. You can do this one of two ways, either through a home mortgage loan or a home equity line of credit (HELOC).

A loan is for a fixed amount, while a line of credit allows you to tap into your home equity until you’ve paid for the project you’re doing.

“While it’s typically faster to be approved for a home equity line of credit, the adjustable interest rate and lack of a fixed payment can be a drawback,” Anastasio says.

In both cases, you’ll have to pay back what you borrowed while juggling mortgage payments, and the bank can use your home as collateral if you fail to make those payments.

“A home equity line of credit is one of the most affordable ways to borrow a significant amount of money,” Giles says. “The interest rate is based on the variable prime rate, which is currently around 5 percent. By comparison, credit cards typically carry interest rates around 17 percent.”

The interest paid on HELOCs is tax deductible for some homeowners, too, Giles says.

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