These Are the Smartest Ways to Pay for Home Improvement

From home equity loans to refinancing your mortgage and more, financial advisors break down the best options.

For as important as certain home improvement projects may be, figuring out how to finance them isn't always easy. "There can be more expenses in a home renovation than the materials needed to complete your project," says Sharon Fletcher, a financial advisor at Northwestern Mutual. "You can expect to need the services of a plumber, electrician, and other technical professionals to assist with a renovation, depending on what your project looks like." Along with the costs of building materials and labor, Barb Pietrangelo, a financial advisor at Prudential, says it's also important to have funds set aside for all of the unexpected expenses that could pop up during a renovation. "It's always good to anticipate the unplanned costs that typically come up during the renovation process," she explains. "Home improvement often costs twice as much (and takes twice as long) as planned."

Young woman renovating her new home, holding construction plan
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Now for some good news: There are several ways to finance these projects without digging yourself into a financial hole. From home equity loans to refinancing your mortgage and more, here are six options for financing home improvements, according to financial advisors.

Open a home equity line of credit.

If you have ongoing renovation projects and at least 20 percent equity in your house, Linda Bell, a personal finance expert at NerdWallet, says a home equity line of credit (HELOC) might be right for you. "Think of a HELOC like a credit card, because it's a line of credit that you can tap into and use when you need it," she explains. "These loans typically have variable interest rates that tend to be lower than a personal loan or a credit card."

Take out a home equity loan.

If you prefer predictable monthly payments, and you have enough equity in your home, Bell says a home equity loan can help you finance a home improvement project. "With a home equity loan, you get a lump sum of money that you repay at a fixed rate," she explains. "While requirements vary by lender, you typically need to have 15 to 20 percent equity in your home."

Consider a home improvement loan.

If you don't have enough equity in your home or just don't want to use it, Bell says you may be able to finance renovations with a personal loan, sometimes referred to as a home improvement loan. "Because the loan is unsecured, you don't have to use your home as collateral," she explains. "The application process is typically faster than other types of home loan financing, and usually must be paid off in a few years."

Refinance your mortgage.

If your current home is in need of repair, Bell says a cash out refinance might make the most sense for you. "With a cash out refinance, you refinance your existing mortgage for more than what you owe and use what's leftover to renovate your home or for other financial needs," she explains. "However, in order to use a cash out refinance, you must have ample equity in your home."

Use a credit card.

For an urgent or inexpensive home improvement project, Bell says you can use a credit card to finance it. "The interest rates on credit cards can be high, so it's important to be smart with how you use them," she explains. "Some cards give rewards for spending on home improvements or offer a zero-percent introductory period to help save money on interest, just make sure you pay the full balance before the offer expires and the interest rates climb."

Apply for a government loan.

If you have or are buying a home that's in need of some repair, Bell says you may want to consider an FHA 203(k) loan. "An FHA 203(k) loan, which is insured by the Federal Housing Administration, allows you to combine the cost of renovations with your mortgage and repay it over time," she explains. "The two types of FHA 203(k) loans, limited and standard, have different rules about what improvements the loans can be used for, but the loans also have less stringent credit score and down payment requirements compared to conventional mortgages—just be aware that you will have to pay FHA mortgage insurance."

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