It is entirely possible to love your home, to be happy with the property you purchased, and yet still have a few things you wish you could change. As a matter of fact, you’d likely be hard pressed to find a homeowner who didn’t. It’s completely normal.
And we can only speculate, but you’re here reading this article, so we have a sneaking suspicion that what’s holding you back are budgetary concerns. Which is fair; we’d all love to trip over a briefcase full of cash we could then put to good use sprucing up our place.
You don’t have to wait for a lottery win or for serendipity to strike, though. There are options available right now that can help you find a way to bankroll your dream remodel. So, to help you plan and prepare in a more proactive fashion, let’s talk about them, and what options are best used for situations like yours.
Ways to Pay for Home Renovations
Very briefly, we’re going to do an overview of what this looks like based on where the money for your remodel is sourced. Broadly speaking, there are three possible sources to pull from:
- Your own money and assets
- Contributions from friends, family, and other individuals
- Organizations, institutions, businesses, or subsidized programs
None of these options are objectively superior to the others. For example, paying from your own finances limits debt liability, but requires larger amounts of capital on hand. Loans and lines-of-credit can help minimize the risk of being defrauded by “generous” individuals. And crowdsourcing your budget from people in your contact list may sidestep fees and interest rates altogether.
There is a lot to consider, and this article is primarily focused on financing (which implies securing funding in the form of loans, credit, or other types of debt). But we want you to be aware of the ways people can—and do—make this happen. Even if the economy at large feels like a roller coaster.
The Bootstrap Method: Covering the Costs Yourself
If you have the means, you can certainly pay out-of-pocket on any work that’s to be done. There’s an argument to be made that this is the most fiscally responsible approach, as you avoid debt liabilities entirely, and only pay the actual cost of the renovations (as opposed to paying principal plus interest on a loan, for example).
Despite that, it’s actually pretty uncommon for homeowners to use this approach. Even among those of substantial means, odds are they’ll take out a loan rather than pay for everything upfront.
As for the rest of us with more modest means, if you’re pulling from savings and emergency funds, it may leave you ill-prepared for unplanned expenditures in the near future. And if you’re pulling from your regular cash flow to pay for things, you’re limited by your own income stream and monthly expenses.
For those who are building a retirement investment account, you may also be able to borrow against those assets, effectively getting a loan from your future self. This isn’t usually advisable though as, among other reasons, it can severely impede the growth of that account (causing problems when you actually go to retire).
We recommend considering this approach if you:
- Are planning a project with limited scope and minimal budget
- Intend to do some or all of the work yourself
- Expect to tackle things a little at a time, over a longer period (instead of all at once), or
- You want the work done quickly, and you had a few dozen grand lying around anyway
Buddies and Benefactors: Seeking Help from Friends and Fellows
This one is a bit more nuanced. On the more unpredictable side of the spectrum, there are legitimate cases of people receiving unexpected windfalls, or suddenly becoming lightning rods for the generosity and goodwill of others. Admittedly, it’s difficult to plan around events like that, so we’ll set them aside.
Instead, let’s talk about more realistic scenarios. For example, you might set up an arrangement with a well-off relative, functioning like a loan but with more forgiving terms. Or you might tap people you know to help supply (or subsidize) materials and labor.
Whatever the specifics, you’re having a direct conversation with the people providing help, establishing clear expectations on both sides.
Our recommendation: don’t count on this one, unless:
- You are related to, or know someone, with the last name McDuck
- Your general contractor buddy owes you a favor
Credit Where Credit’s Due
Ok, bear with us, as the world of loans, credit, and financing is…not always straightforward. There are a lot of options in this category, and in some cases, they look very similar.
Loans
As it’s going to become relevant here very soon, we’re going to give an oversimplified definition of a loan:
A loan is a form of debt where a lending institution provides a lump sum amount, that the borrower then pays back in set installments over a fixed period. There’s some wiggle room there—variable rate loans lead to variable payback installments, and some loans pay in a series of lump sums rather than just one. But overall, a home mortgage is a good example of what a loan looks like. Borrow a stack of cash, buy a thing, then pay back money with interest.
In this category alone, you have quite a selection to choose from.
The most straightforward (but least tailored to this use case) is a personal loan. Personal loans can be used for just about anything, and they’re available at most banks and credit unions. But they’re the least adapted to paying for homes and home renovations. They tend to cap the amount at lower values, have shorter term lengths, are heavily impacted by your credit score, and might carry higher interest rates.
A key attribute of personal loans is that they are unsecured, meaning that you don’t offer collateral for the loan. That means you’re not putting anything at risk of repossession.
Home equity loans are secured loans, meaning you offer up collateral as part of the agreement. In this case, the collateral is your house—specifically your “equity,” or the portion of your home’s value you’ve already paid off. If you’ve paid down half your mortgage, then the half you’ve paid constitutes your equity (more or less). That’s your collateral and, ostensibly, your borrowing limit.
Of note here is that home equity loans have terms similar to mortgages, often up to 30 years.
Now for some disambiguation. Home improvement loans, home renovation loans, and construction loans all use some similar words, but aren’t necessarily synonymous.
Home renovation loan is kind of the umbrella term here for most of this. If you use a home equity loan to pay for remodels, it’s often referred to as this, for example.
The umbrella term is also sometimes used to refer to home improvement loans, and vice versa. Depending on where you go, the names may actually differ. But in general, a home improvement loan refers more to the purpose than the loan type. They can be secured loans (like a home equity loan), or they can be unsecured (like a personal loan). The term length is usually longer than standard personal loans but often shorter than home equity loans.
What’s unique about these dedicated, for-remodel loans is this: if they’re secured loans, the equity is often measured by the value of the home after renovation, rather than its current value. That potentially gives you more borrowing power, especially if the project will be a big glow-up for the property.
Finally, we have construction loans. These are kind of weird. For one, their intended use is for new builds, not remodels (though they are sometimes used for that regardless). They pay out in chunks based on the progress of the build, and a lot of contractors don’t like working with them due to their complex and finicky nature.
Ultimately, when shopping for a loan, you’re looking at the following features and trade-offs:
- Secured vs. unsecured
- Credit score limits
- Borrowing limits
- Interest rates
- Repayment terms
Which one suits you best will depend on how much equity you have, how expensive the project is, how much you can afford in monthly payments, how worried you are about providing collateral, how good your credit score is, and how many terms you want to spread the repayments over.
Lines of Credit
If you’ve never heard the term, lines of credit are a little different. They don’t pay out in lump sums or chunks like loans. Instead, they provide an amount you can spend, up to a maximum, with repayments determined by how much you used.
The classic example of this is credit cards, and while you can use them for smaller purchases or portions of the project, we wouldn’t normally recommend them for an entire renovation, for two reasons. First, the spending limit tends to be lower than you need. Second, the interest rates tend to be much higher, leading to expensive monthly payments.
A common choice in this scenario, though, is what’s known as a Home Equity Line of Credit (or HELOC). HELOCs use your equity as collateral the same as an equity loan, but function closer to how credit cards do. If you don’t need the full amount, you don’t have to spend the full amount, which means you have less to pay back.
Where they have the edge on credit cards is how that equity impacts the dollar values. You get a higher spending limit, and your interest rates are more manageable. That said, most HELOCs have a cutoff date, after which the repayment period begins.
Unlike credit cards which support ongoing use but require ongoing monthly payments, most HELOCs don’t start charging until the repayment period starts. Once it does, though, you’re no longer allowed to spend from the account.
Refinancing
Before we move on to some less common, less conventional options, let’s talk about refinancing.
Refinancing is the process of taking a loan-in-progress, and then taking the negative equity you still have left and converting it into a brand new loan. If you have, say $200k left on a mortgage and refinance, that remaining $200k will be used as the new loan amount, restarting the repayment term, and stretching the payments across 30 years.
So instead of 10 or 20 years left of the mortgage you started with, you’re starting from the beginning again, but with a lower principle (and thus lower monthly payments).
There are different ways to go about refinancing, with cash-out refinancing being a common one. If you’re looking to reduce your mortgage payment and get a remodel, but don’t want to add more debt to your plate, this is a way to turn your equity into cash, which can then be used to pay for renovations.
However, there’s also an option for home improvement refinancing. Again, the words here are often swapped around, but here’s what it looks like.
In this case, you’re refinancing to make use of your equity, but you’re also getting a loan payout to cover costs. Critically, you’re also tapping into the potential future equity of your home after the remodel is finished. It’s definitely something that’s more complex than we’re really qualified to try and explain in a blog post, so talk to your lender about the specifics. But in a nutshell:
The planned renovation boosts your home’s appraisal value, which changes its value in relation to the original loan amount, increasing your equity before you’ve even paid for any work. Depending on just how much equity that leaves you with, this may seem like the winner of the bunch.
Just be aware: refinancing is functionally a new mortgage, so you have to pay fees and closing costs just like you would with a new home purchase. Oh, and if you don’t have much equity, you may not even be able to qualify for one.
Other Options
In addition to all of the options mentioned above, there are a few oddballs worth mentioning.
There are a few subsidized government loans that are available for things like this, including:
- FHA 203(k) loans
- Fannie Mae HomeStyle Renovation loans
- VA renovation loans
- USDA renovation loans
- Freddie Mac CHOICERenovation loans
The specifics of the loans vary, but most have unique stipulations tied to things like income limits (to help lower income earners), geographic location, veteran status, and so forth. Also, some of these loans are intended to be used as part the mortgage itself, meaning you’re buying the house with the intent to remodel, and the mortgage amount includes all of that in the numbers.
Also worth investigating are programs, rebates, offers, tax credits, and such that are more specific to the remodel type (like improving energy efficiency), where you’re located (e.g. some are offered by local utility providers), and things of that nature. There’s too much nuance to dig into that here, but we wanted to bring it to your attention.
Finally, in the unlikely event that you end up with an insurance claim with repairs that impact the stuff you’re hoping to remodel, you may have a singular opportunity on your hands. If the claim is covered and they’ll pay out as you expect, that can give you a chance to make changes and improve some things in the process.
Just be aware that a) the insurance will only pay based on the value that’s insured, b) there may be limitations on who you can use to do the work, and c) to make the most of it, you either need a way to source labor and materials for less than the payout is calculated against, or you need to be willing to chip in some cash of your own to cover the difference.
Ultimately, though, everyone deserves a home, and ideally one they can be happy with. And while it’s not always easy or quick, we like to help people in their efforts to reach that lofty goal.
Check us out at Homeowner.org for more on home improvement. We’re here to be your ultimate resource as a homeowner!
