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Whether you’ve been living in a house for ages or just bought a fixer-upper, you will have to make a few repairs and replacements to refresh your home’s look. But, home improvement projects come at a high cost. And, that’s why most homeowners think of home remodel financing programs — the most convenient option, both for massive overhauls as well as little repair work.
Up until recently, if you wanted to borrow money for maybe a kitchen renovation, a bathroom remodeling, a room addition, or a roof replacement — your only financial option was perhaps to go to a bank or a credit union, and hope that the loan officer grants you the loan.
However, fortunately, today you have many more loan options to help finance home improvements. A mortgage broker will have you know that there are more than 200 different loan programs available. A few, even for those whose credit history is less than perfect.
That means that your chances of getting good home remodel financing are stronger than you think. But, with so many competing lenders, loan options, terms, and conditions — how to finance a home remodel?
Well, you can end the confusion once you understand the ins-and-outs of home remodel financing. So, let’s begin our exploration!
What is the average cost of a home remodel?
The average cost to remodel a house runs about $19,800 to $75,000 — depending on the scope of the project, the total square footage, quality of materials used, labor costs, and your zip code.
On average, a whole-house renovation costs $15 to $60 per square foot.
Keep in mind that the right home improvements can add immense value and equity to your property.
Want to create a budget for your home renovation project? Try our free remodel cost estimator. It’s easy to use and gives cost estimates in minutes!
Ways to finance a home remodel, are they a good idea?
Home remodel financing comes with a number of benefits, including providing you with funds to plan large-scale home improvements and get you a longer period of time to repay the loan. Of course, how a home renovation loan works will depend on the type of financing you apply for.
To determine if getting a home renovation loan makes financial sense for you, you’ll have to consider the size of the remodeling project, your renovation budget, and the return on investment.
You should only consider borrowing funds if you’re confident that the money spent will either increase the value of your property or the ROI — as in the case of attic insulation, basement remodeling, bathroom renovation, or a front door replacement.
Read more: Why does my home loan keep getting sold
What is the difference between home equity loan and home remodel loan?
The biggest difference between a home equity loan and a home remodel loan is that with a home equity loan, you have to use your home as collateral to secure funds. That’s why home equity can get you more money, lower interest rates and longer payoff times than home remodel loans.
Moreover, home equity loans can be used for just about anything, including home improvements. Home remodel financing, on the other hand, can be used only for a home renovation project.
Read more: Home addition loans: Financing a home addition
What is the best way to finance a home remodel?
The best ways to finance a home remodel are unsecured personal loans, home equity lines of credit (HELOCs), home equity loans, mortgage refinances, government-backed loans, and even credit cards. We’ll discuss these home remodeling financing options in more detail, with their pros and cons, below.
The best way to finance a home remodel without equity is an unsecured personal loan. Since there’s no collateral involved, the loan’s eligibility depends on your credit score, credit report, and income.
What are the different home remodel financing options?
Unsecured personal loans
If you do not want to link the value of your home with your loan then a personal loan is a good option. Personal loans let you borrow against your financial health and credit score. The loan provides a lump sum to complete your reno projects. Pros Cons Does not use your home equity as a collateral Limited loan range of $1,000 to $50,000 Simple application process May not be enough to cover the entire renovation cost Provides on-hand funds May include costly loan origination fees
Read more: Kitchen remodel financing & loan options
Home equity loans
A home equity loan uses the existing value of your property or your home equity to get the “secured” loan.
Let’s take an example to understand this type of home loan. If the market value of your home is $400,000, with a $300,000 mortgage loan, your home equity will be $100,000. Banks will let you borrow only up to 80% of this value to fund your renovations. Pros Cons Lower interest rates than a personal loan or credit cards You use your home as collateral, so need good equity. Any payment default could lead to property foreclosure The loan amount can be used for any purpose Potential fees and closing costs Comes with prepayment penalties
Home equity line of credit (HELOC)
Home equity line of credit aka HELOC loan also makes use of the equity in your home, but unlike a home equity loan, you don’t get a lump sum here. Instead, you get a line of credit from which you can draw funds. Moreover, you only need to pay interest on the amount you actually use. HELOCs typically come with a 10-year draw period and a 20-year repayment period. Pros Cons You only pay interest on what you use Variable interest rates Comes with lower interest rates, especially for the first 12 months Fluctuating rates may increase total borrowing costs Any payment default may lead to foreclosure of the property
Mortgage refinance
In a typical cash-out refinance, you use your home equity to apply for a new, larger mortgage — with better rates. You get access to a large pool of cash while pocketing the difference in the interest rates between the two types of mortgages. Here too, you can refinance for up to 80% of your equity. Pros Cons Favorable interest rates Requires home equity You can use the funds on demand High closing costs (2% to 5% of the total loan amount)
Credit cards
Credit cards are a good option for smaller-scale home remodeling projects. It does require you to have a solid repayment plan in mind though. Otherwise, you could face the risk of maxing out your cards — leaving no room for any more purchase. Pros Cons No need to apply for a loan Higher interest rates Ready cash available Needs to be paid monthly Credit card companies offer introductory 0% APR for an initial 12 to 15 months You may have no room for any other purchase if you max out your credit card limit
Government loans
A government loan like the Federal Housing Authority-backed FHA 203(k) loan would let you borrow funds for your home remodel financing. It keeps the renovation funds into an escrow account from which the remodeling contractors are paid directly.
The FHA Title 1 loan lets you borrow money to make your house more livable or energy-efficient, as long as you’ve owned it for a minimum of 90 days prior to applying for the loan. Pros Cons No requirement for home equity Funds can be used only for home renovation projects Government backing makes obtaining the funds easier for those who’re eligible Such loans prohibit DIY work; they only recognize work done by licensed professionals
Savings
There’s always the option of using your current savings to fund your fixer-upper. Of course, you should have sufficient money in your bank account to cover the cost of the renovation. Pros Cons No loan application or loan approval process required May leave you cash-strapped, with no money for sudden emergencies No loan fees, interest rates, or closing costs You may realize mid-renovation that you still need a loan if the budget goes awry
Now that you have a good idea about all your home remodel financing options, you can choose the best type of loan for home improvements.
What to avoid when considering a home remodel loan?
One of the most important things to consider when deciding on a home renovation loan is the risk involved. If you default on a loan payment, it could cost you your beloved home!
Another mistake to avoid is investing too much in your remodeling. Too many or too expensive improvements can do more harm than good — and make your house stand out like a sore thumb in the neighborhood. If your home sale prices are much more than buyer expectations in your area, you could be damaging the marketability of your home.
Finally, don’t rush to apply for a loan. Meet with several loan lenders, research the available rates (usually 6% to 36%), figure out the remodel financing costs and fees and finally try to improve your credit score before applying for a loan. The rule of thumb is, the higher your credit score, the lower will be your interest rates.
How to apply for a home remodel?
Before you apply for home remodel financing, remember that renovations often end up being more expensive and time-consuming than anticipated. You should also ensure that your financial situation is able to handle the burden of a home loan.
Once you’re clear about these issues, it’s time to apply for a loan! Looking for a home renovation loan? Peruse through Kukun’s easy loan options.
Read more: 8 Ways to keep a home remodel running smoothly
Last words on how to fund a home remodel
Making upgrades to your home can be a wise investment as a well-planned renovation increases your home’s resale value, apart from adding to its comfort, looks, and style. If you’re planning a large-scale reno, you would definitely need home remodel financing. And, now you know which one will be suitable for you!
Read more: Bathroom Remodel & Renovation Financing Options
Written by Ramona Sinha. October 19, 2020
Ramona is a content writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. An avid traveler, she’s a digital nomad at heart and an animal lover from the depths of her soul.
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