Financing a Home Renovation 101

Tips and Practical Advice from Finance Professionals

Almost every homeowner dreams of, or undertakes a major renovation of their home. From an expansive kitchen to a master bathroom retreat, or an addition to accommodate an expanding family, a major home renovation may add substantial value to the home and enrich the owners’ lives. But getting from the dreaming stage to the building stage can feel intimidating, so we’ve put together a few insights about the process to help you get started. 

Using a full service “Design/Build” renovation company is a good way to approach a large project. Often these “one stop shops” have preferred finance professionals who can help you assess the best way to fund a project based upon your circumstances. Evaluating the scale and cost of a project along with your income, cash on hand, home equity and other factors will help determine a financing option that suits you BEFORE ever having to speak to a lender.

According to Bankrate.com, following are ways home remodel projects are funded: some much more preferable than others depending on the scope of work:

Construction Loan

Construction loans are short term (usually about one year), higher interest rate loans that a lender will pay out directly to a contractor in stages as work is completed. Once remodeling is complete, the loan is paid off or – more typically – converted to a long-term mortgage or loan. 

Home remodel or home repair loans

Best for small or mid-size projects, these “unsecured” loans (no need to use your home as collateral) have fewer fees and shorter repayment terms

Home equity line of credit, also called a HELOC

A secured loan, where your home is collateral, that is often available at a lower variable interest rate. The convenient “revolving” credit aspect allows borrowers to take what they need, when they need it, up to a certain predetermined amount. 

Home equity loan

A home equity loan, aka a “second mortgage,” is another type of secured loan paid out in a lump sum with repayments at a fixed interest rate. 

Mortgage refinance

For those who have a reasonable amount of equity in their homes, refinancing and taking “cash out” might be the best way to go. Borrowers tend to get a fixed competitive interest rate and continue to only have a single loan payment. 

Credit cards

With typically high interest rates, credit cards wouldn’t be a good financing tool for a home improvement project unless it was fairly minor. If the intention is to pay off the borrowed amount quickly, using a credit card is certainly a convenient option. 

Finally, to get the most affordable and practical financing option for your family and your project, be prepared for discussions with financing professionals or lenders. 

• Bring or re-familiarize yourself with recent tax returns. 
• Check with your mortgage lender for up-to-date payoff/equity amounts.
• If it’s been many years since you purchased your home, or the market has changed significantly, have a good understanding of your homes current value. 
• Check your credit score, usually your credit card company will provide a current score free of charge. A finance specialist at a Design/Build renovations company should be able to help you
• Have detailed information about the scope of work and cost of the project from a reputable renovations contractor. 

There are many financing options and factors to consider when undertaking a large-scale home improvement project. Seeking out stable, reputable builders with lots of internal resources you can leverage charts the path to a successful home renovation. Carefully evaluating renovation contractors, the financing options available to you, and making sure you have a clear picture of your finances are all things that will help ensure you get the funding option best-suited for your project and your situation -- at the most competitive terms.