Do you have a leaky roof, broken garage door, or a run-down kitchen? Owning your home means you’ll inevitably need to fix something while you live there – whether it’s a small patch or redoing an entire floor. It can seem like a lot, but here are tips for how to get a home renovation loan or financing
While some renovations are exciting (like a new kitchen), others are must-fix maintenance issues (like a leaky roof) that pop up at inopportune times. Regardless of the timing, you have to address these maintenance issues quickly to prevent further damage – or a decrease in your home value.
However, it can be hard to pay for renovations (especially unexpected ones). While paying in cash is great, it’s not always feasible. Luckily, there are a variety of financing options to make paying for your renovation doable.
Your options are:
- Refinancing Your Mortgage
- Renovation Loan
- Credit Card
- Home Equity Investment
Wondering what these options entail and which one would be best for you? Read on to learn about financing options that simplify paying for your renovation.
Refinancing Your Mortgage
One option that can help you pay for your renovation is refinancing your mortgage. When you refinance, you get a new loan in place of your original mortgage. There are two main types of refinancing – traditional refinancing and cash-out refinancing.
Traditional Refinancing
With traditional refinancing, you take out a new loan on your home for the amount you have left to pay off.
If interest rates are low and you have good credit, you can potentially get a better interest rate. This saves you money in the long run – because you’ll pay less interest over time. Plus, it can make your monthly payments lower.
You have the option to get a new 30-year mortgage or a shorter mortgage term (like 15 years) when you refinance. While a 30-year term will lower your monthly payments more, you’ll pay more over the lifetime of your home in interest. If you can make the 15-year monthly payments, that’s the best option to avoid paying more with a refinanced mortgage.
A traditional refinance can help you lower your monthly payments, which provides more opportunity to save up for a renovation. This option works well if your renovation needs aren’t urgent. If they are, you should consider other financing methods.
Cash-Out Refinancing
Like traditional refinancing, cash-out refinancing involves replacing your original mortgage with a new one. However, with cash-out refinancing, you take out a new mortgage for more than you owe on your home.
After closing, you get money for the difference between the amount you owe on your home and the amount of the new loan. You might also be able to get a lower interest rate on your mortgage with cash-out refinancing – saving you money on monthly payments.
The largest downside of cash-out refinancing is that you’re taking out a loan that negates the progress you’ve made towards paying off your home. In effect, you’re selling the equity you have in your home back to the bank.
For example, if your home is worth $300,000 and you’ve paid off $150,000 of your mortgage, you’re halfway to paying off your home. With a cash-out refinance, you can take out a loan for 80-90% of your home’s value – so at most $270,000. If you do a cash-out refinance for that amount, you receive $120,000 in cash.
While that money can be incredibly helpful, you’re taking on an additional $120,000 in debt in your home – meaning you’ve only paid off $30,000 of your mortgage. Whereas you had paid down 50% of your mortgage, after a cash-out refinance, you’ve only paid down 10%. Plus, you’ll end up paying more interest on your home than you would have with your first mortgage.
A cash-out refinance is a good way to access some of the equity you’ve built in your home. However, it will increase the amount you have to pay on your home, so it’s an option you should consider carefully before doing.
Pros of Refinancing
- Lower interest rate
- Option for cash from equity
- Can decrease monthly payment amount
Cons of Refinancing
- Closing costs
- Need good credit
- Could owe more on your home than it’s worth in a market downturn
Renovation Loan
Another option for financing your renovation is to take out a loan to fund your home improvement. There are 4 main types of renovation loans:
- Home Equity Loans
- Home Equity Lines of Credit
- Government Loans
- Personal Loans
Home Equity Loans
Home equity loans are a type of second mortgage on your home that allows you to borrow against the equity you’ve built in your home. With a home equity loan, you’ll receive a lump sum for the amount you borrowed to use as you see fit (such as renovating your home).
Similar to cash-out refinancing, home equity loans allow you to use your home’s equity to fund your renovation. However, home equity loans are a separate loan for up to 90% of your home’s value. Your home is used as collateral for the loan – meaning your lender can foreclose on your home if you default on your loan.
Home equity loans tend to have higher interest rates than your first mortgage. You can have a loan term up to 30 years with a home equity loan. If you have built up a lot of equity in your home and have good credit (most home equity loans require at least 680 credit score), then this loan could be an option.
Home Equity Line of Credit
A home equity line of credit (HELOC) is another loan option that uses the equity you have in your home as collateral. HELOCs are also a type of second mortgage and do carry the risk of foreclosure if you default on them.
Unlike home equity loans, with a HELOC, you don’t get a lump sum. Instead, you get a revolving credit line with a maximum borrowing limit that’s established upfront. It works like a credit card. You can borrow from this credit line as many times as you want until you hit the maximum borrowing amount. You also don’t have to use all the available credit.
HELOCs have two periods – draw and repayment. During the draw period (usually the first 10 years), you can take as much money as you want from your credit line without needing to pay it back until the repayment period. During the repayment period (usually 10-15 years), you have a monthly payment for the amount you borrowed plus a variable interest rate.
HELOCs offer flexibility and the option to forego your monthly payment initially. They can be a good choice if you aren’t sure how much you need, you have good credit (at least 680), and plenty of equity in your home.
Government Loans
Government loans are another option to finance your renovation. Instead of a specific loan, government loans are a category of loans that are usually insured by the government. This makes them easier to qualify for if you have poor credit.
One of the most popular government loans for renovations is a Title I loan insured by the Federal Housing Administration (FHA). This loan can only be used for renovations that are necessary or improve the function of your home.
Another common government loan option is the Property Assessed Clean Energy Programs (PACE) loan, which can only be used for energy-efficient updates.
This loan can make it hard to sell your home because it’s attached to the property – instead of the borrower. As such, you repay it through property taxes instead of a lender. This means that you’ll have very high property tax bills, which can be a challenge to pay if you’re struggling financially.
Government loans are an option if you have poor credit and are making qualifying improvements.
Personal Loans
Personal loans are an unsecured loan that can be used for anything – including home renovations. Because they aren’t secured (unlike loans that use your home as collateral), your eligibility depends almost entirely on your credit score.
While you can be approved for a personal loan with a credit score as low as 580, you’ll likely have a very high interest rate – meaning you’ll pay back more over the lifetime of the loan.
Personal loans also generally have a shorter loan term (2-5 years), so you’ll have higher monthly payments than with other loan options. However, this will allow you to pay less interest.
If you have good credit, don’t want to risk your home, and can make higher monthly payments, a personal loan is an option.
Pros of Renovation Loans
- Variety of borrowing options
- Option to get a lump sum or credit line
- Some are easier to qualify for
Cons of Renovation Loans
- Most have strict credit requirements
- Added monthly expense
- Risk of foreclosure
Credit Card
Paying for your home improvement project with a credit card is another option to finance your renovation.
Nearly everyone has a credit card, so they offer an easy source of financing. If you have a very high limit on one card, you can entirely finance your renovation with one credit card. You can also spread the renovation cost between several lower limit cards.
While credit cards are an easy way to pay for your renovation, they should be used with a lot of caution. Credit cards generally have very high interest rates – with the average rate being 21.21%. This means that you’ll end up paying much more for your renovation if you can’t pay it off right away.
The high interest rates also make it easy to get into a payment hole you can’t get out of. Often, the payments you make on your project monthly will be less than the interest you accrue each month – making it nearly impossible to pay off your project.
Credit cards offer an easy way to finance your home improvement. However, high interest rates can make it nearly impossible to pay off your project. Carefully consider your options before deciding to finance your project with a credit card.
Pros of Credit Cards
- Easy to obtain
- Potentially able to finance entire renovation
- Only required to make a minimum monthly payment
Cons of Credit Cards
- Very high interest rates
- Likely to pay more over the lifetime of your project
- Easy to become overwhelmed with paying for your project
Home Equity Investment
While refinancing, loans, and credit cards are traditional methods for financing your renovation without cash, a Home Equity Investment from Point offers an alternative. With a Home Equity Investment from point, you can get up to $350,000 for financing your renovation.
Unlike a loan, you won’t have a monthly payment. Instead, you can repay Point’s investment any time in the 30-year term or when you sell your home. This allows you to pay for necessary renovations now without worrying about another monthly expense.
Point also considers a much wider range of homeowners than traditional lenders. Like, those with lower credit scores (as low as 500), or homeowners with higher debt to income ratios. If you’re unable to qualify for other financing options due to your financial situation, you still have a good chance to qualify with Point.
Plus, with Point, you don’t have to pay traditional interest on the money you receive. Instead, at the end of the agreement, you pay back the lump sum plus a portion of your home’s future appreciation. This appreciation amount is determined at the beginning of the process.
If you need to renovate your home but don’t qualify (or want) to refinance your mortgage, take out a loan, or use a credit card, Point provides a great option for financing your renovation.
Pros of Home Equity Investment
- Not a loan
- Don’t need great credit to qualify
- No monthly payments
Cons of Home Equity Investment
- Minimum funding amount of $35,000
- Point may need to pay off some of your creditors with part of your funds
- Not yet available nationwide
Wrapping It Up
Renovating your home can be an exciting time. You get to update your home and make sure everything is in working order.
However, it can be challenging to find a way to pay for your renovation. If you have necessary repairs, it can seem easier to live with a leaking roof, drafty home, or periodically flooded basement than to pay to fix those – especially if you’re already dealing with financial hardship.
While not fixing issues will save you money in the short term, deferring maintenance can cost you much more in the long run. Neglecting necessary fixes can cause more costly problems down the road – like foundation damage from a flooded basement. It can also dramatically decrease your home value because buyers want a fully functioning and move-in ready home.
The good news is that cash isn’t the only way to finance renovation projects. Your financing options include:
- Refinancing Your Mortgage
- Renovation Loan
- Credit Card
- Home Equity Investment
All of these options allow you to get the money you need for your renovation project. A Home Equity Investment from Point offers an alternative to traditional financing methods, and it isn’t a loan. Plus, you don’t have to worry about monthly payments, high interest rates, or strict eligibility requirements.
When you partner with Point, you simply get the cash you need. You can repay Point’s investment (plus a percent of your home’s future appreciation) any time in the 30-year term (or when you sell your home). If you want an alternative to traditional loans, see how much you can get with a quick quote from Point.