Remodel your way: How to finance a home renovation

The cash needed to renovate your home could come from savings, from credit cards, or from personal loans.

Or, the money could come from your home itself.

Home equity loans let borrowers use their home's value to pay for renovations. This is an elegant solution for homeowners who have enough equity and who manage their home improvement projects well.

Renovating a home with home equity

Home equity is the already-paid-off value of your home. If your home is worth $500,000 and you owe $250,000 on the mortgage, the other $250,000 is your home equity.

Home equity loans help homeowners use this equity.

The equity borrowed from a home can be spent on anything, from a college education to a tropical vacation. But using home equity to tackle a home renovation project has an added perk: It can add more value to the home, creating more home equity.

Three different loan products can help homeowners accomplish this goal:

Using a home equity loan to renovate a home

Home equity loans pay out a lump sum of cash from home equity, cash that can be spent on home improvements. These loans are also known as second mortgages because they work so much like home purchase loans, only smaller and with shorter terms.

Home equity loans usually come with repayment terms ranging from 10 to 20 years. They can be repaid early, restoring the equity back into the home sooner.

Unless their home is already paid off, borrowers who get home equity loans will make two mortgage payments each month: They keep paying their current mortgage, and they add a second monthly payment for the home equity loan.

Using a HELOC to renovate a home

A home equity line of credit can also pull equity from a home. Also known as HELOCs, home equity lines of credit resemble credit cards. They open a revolving credit account that's secured by home equity.

Homeowners who open HELOCs can withdraw funds from the HELOC as needed rather than taking out a lump sum of cash. The HELOC's monthly payment is based on the amount of credit in use, not the full credit line.

Since equity in the home secures the credit line, lenders can offer lower interest rates on HELOCs compared to credit cards.

A HELOC usually begins with a 10-year draw period, during which the homeowner can draw funds as needed, up to the credit limit, while making payments on the balance based on a variable interest rate. 

Then, when the draw period ends, the HELOC's balance, at that time, converts to a fixed loan with a term that typically ranges from 10 to 20 years.

Using a cash-out refinance to renovate a home

Unlike home equity loans and lines of credit, which leave the primary mortgage on a home in place, cash-out refinances borrow home equity while also paying off the current mortgage.

For example, the owner of a $500,000 home with a mortgage balance of $250,000 might get a new $350,000 mortgage. The first $250,000 of the new loan would pay off the old loan. The remaining $100,000 would be paid, in cash, to the homeowner.

Then the homeowner starts making payments on the new $350,000 loan instead of the old loan.

Using a cash-out refi for home improvements can increase the home's value, creating more equity in the future.

...in as little as 3 minutes – no credit impact

Can I finance home improvements without using home equity?

Using home equity to finance home improvements can lead to lower interest rates since this method uses the home value as collateral, lowering the risk to the lender.

Not every homeowner has enough equity to use. Fortunately, there are other ways to pay for home renovations. 

Using cash to renovate

Paying cash eliminates interest charges and closing costs altogether. Homeowners who have enough cash on hand can do this.

The upside: Avoiding interest charges, closing costs, and loan payments.

The downside: Money spent on home renovations can't be spent, or invested, elsewhere.

Using credit cards to finance renovations

Credit cards provide fast funding for smaller projects, especially those under $5,000 to $10,000. Cards that offer 0 percent APR promotional periods can help homeowners avoid interest charges if they pay off the balance in time.

The upside: Fast funding with few questions asked.

The downside: High interest rates (think 20% to 29%) since the credit is unsecured.

Using personal loans to renovate

Personal loans offer a middle ground. Like credit cards, they offer unsecured borrowing which speeds up the approval process. Like home equity loans, they usually offer a fixed interest rate and level payments.

The upside: Fast loan approval; no lien on the home

The downside: Higher interest rates than home equity loans since credit is not secured by home value.

Government loans and grants for home renovations

Homeowners who need to renovate, and home shoppers looking at fixer-uppers, should also consider:

FHA 203(k) loans

The 203(k) rehabilitation mortgage through the Federal Housing Administration combines home purchase or refinancing costs together with renovation costs.

This program excels for buyers purchasing fixer-uppers or homeowners planning major updates like structural repairs, room additions, or complete kitchen overhauls.

There are rules to consider. The FHA needs to make sure you have a sound plan for renovations and will be working with a qualified contractor. 

FHA Title 1

FHA Title 1 loans can finance essential repairs without requiring home equity as collateral. These loans cover basic improvements like roof repairs, HVAC updates, and accessibility modifications. Interest rates typically come in lower than personal loan rates, creating more affordable monthly payments for many homeowners.

VA renovation loans

Veterans and active-duty service members can access VA renovation loans that combine purchase or refinancing with home improvement costs. These loans often feature competitive interest rates and reduced closing costs compared to conventional options.

Grant programs

Your local government might offer energy-efficiency rebates and home repair help through community development programs. Check your city or state websites for specific opportunities. Some programs provide thousands in grants for qualifying improvements.

Nonprofit organizations also offer grants for low-income residents who need critical home repairs. These programs often target home improvements that address safety problems: rewiring a home to remove dangerous wiring or making structural repairs, for example.

Understanding home renovation costs

Before deciding how to finance home renovations, homeowners need to know the scope of their project.

Projects usually fall in one of two categories:

• Urgent needs that address the safety and security of the home.
• Updates that modernize or enhance the home's livability.

Common home improvements include:

Kitchen remodels

Kitchen renovations cost anywhere from $15,000 to $100,000 or more depending on the size and scope of the project.

Money spent in the kitchen is typically a good investment. It can increase the value of the home.

Common improvements include new cabinets, countertops, and appliances, along with flooring, lighting, and seating. The age of the house affects costs. For instance, the kitchen may need new plumbing and electrical work to meet current building codes.

Home equity loans and HELOCs excel at covering kitchen costs.

Bathroom remodels

Bathroom renovations typically require $10,000 to $30,000 or more, depending on the scope of work. As with kitchens, bathroom remodels can add value to the home. 

A homeowner who wants to add luxury features like bidets or heated flooring will likely need to upgrade the home's plumbing and electrical systems to accommodate the new features.

Home equity loans and HELOCs, along with personal loans, are good options for financing bathroom remodels.

Other major projects

Other common home improvement projects include:

• Roof replacement: $15,000 to $30,000 on average
• Solar panel installation: $20,000 to $30,000
• Landscaping: $2,500 to $5,000
• In-ground swimming pool: $60,000 to $75,000

HELOCs work well for homeowners who want to spread big projects across several years. Homeowners can use the HELOC to finance a project, pay off the balance, and then use the same credit line again.

With a HELOC, borrowers pay interest only on the amount of credit in use, not the full credit line. 

...in as little as 3 minutes – no credit impact

Tips for planning home renovations

Smart planning can help keep a home improvement project on track and in budget.

Budgeting

Add at least 10 percent to your expected costs as a project contingency. That way if unexpected problems surface, you won't have to re-think your financing options.

Borrowers who own older homes may want a bigger contingency: 15 to 20 percent, for example.

Finding qualified contractors

Get project quotes from several different qualified contractors in your area. Be sure you're working with licensed contractors who have their own insurance. Also, make sure the contractor will get the building permits needed for your project. Not all projects require permits, but most do.

After choosing a contractor, set up a payment schedule that's tied to project milestones. Don't pay the full amount before work begins or is completed. 

A few hours of research and planning upfront can save thousands in costly mistakes or delays later.

Calculating return on investment (ROI)

Kitchen and bathroom remodels usually add to the home's value right away. In that way, these kinds of projects pay for themselves, at least in part. 

Not so for specialized and luxury additions like swimming pools and heated tiles. These sorts of projects probably won't add much value to the home, but they can make the home more enjoyable. 

Maintenance projects like replacing the HVAC or roof can restore a home to its potential value and protect the home from depreciating. 

Surprises to expect

Renovations rarely unfold exactly as planned. Common unexpected issues include:

• Hidden structural damage
• Outdated electrical systems that require upgrades
• Plumbing complications
• Permit delays

Financing surprises can impact your budget too. Origination fees, appraisal costs, and closing costs add to project costs. Factor these into your total project cost from the beginning.

Update your homeowner's insurance after major renovations to protect your enhanced investment. Your coverage should reflect the improved value of your property.

Home renovation FAQs

How is a home improvement loan different from a mortgage?

A traditional mortgage finances a home purchase. A home improvement loan finances upgrades to the home.

That said, mortgages and home equity loans have similarities. Both use the home's value as collateral to lower interest rates for the borrower. Both also depend on the borrower's credit score, debt-to-income ratio, and monthly income for qualifying. Lenders take bigger risks with personal loans and credit cards, so they charge higher interest rates on the debt. 

How much home equity do I need to qualify for a HELOC or home equity loan?

Most lenders require at least 15 to 20 percent of the equity to remain in the home. To meet this rule, the owner of a $400,000 would need to leave $60,000 to $80,000 in unborrowed home value. That would mean a maximum loan size of $320,000 to $340,000 on the home, depending on the lender.

Keep in mind the current mortgage balance also comes out of this total. If the lender would allow a maximum loan of $320,000, for example, and the current mortgage balance is $220,000, the maximum loan size would be $100,000.

Better Mortgage can approve HELOCs that use up to 90 percent of the home's value for borrowers who meet requirements. 

Which option is better for renovations, a home equity loan or a HELOC?

Home equity loans and HELOCs are both designed to finance home improvements.

Home equity loans have fixed rates, a fixed loan amount, and fixed payments. They're best for large, one-time projects.
HELOCs can be used, repaid, and used again and the loan payment depends on the amount borrowed and the current interest rate. HELOCs are great for ongoing renovation projects. 

How much does a typical home renovation cost?

Prices vary widely by region, project scope, and the condition of the home. It's common to spend $40,000 to $50,000 renovating a kitchen and $10,000 to $20,000 on a single bathroom remodel. 

How much could you spend on home renovations?

Using home equity to finance home renovations can lower monthly borrowing costs.

To see your rate on a home equity loan, a HELOC, or a cash-out refinance, you can start with a pre-approval from Better Mortgage.

A pre-approval estimates your borrowing power and your monthly costs. 

...in as little as 3 minutes – no credit impact