How to Finance Your Home Renovations

As interest rates start to slightly dip, homeowners are dusting off their renovation wish lists. An enhanced home is tempting, whether you’ve been daydreaming of a new kitchen complete with a farmhouse sink or an updated bathroom.

But before you start perusing faucets and tile samples, it’s time to decipher the most important question: How will I fund home renovations?

This starter’s guide covers the three most common ways to pay for a major home upgrade: cash-out refinancing, home equity lines of credit (HELOCs), and home equity loans. Each option works a little differently, and choosing the best option will depend on your needs.

Cash-Out Refinancing

Through this borrowing method, you’ll be able to access your home’s equity, but you’ll end up with a larger mortgage. Essentially, cash-out refinancing replaces your current mortgage with a larger one, and you keep the difference.

Pros:

• Opportunity for a lower mortgage rate
• Could access more money than what’s available through a standard personal loan
• Lower annual percentage rate than other financing types

Cons:

• A larger mortgage payment
• Prolonged payments if you can’t shorten your loan term

Home Equity Line of Credit (HELOC)

A home equity line of credit is like a credit card — except your home is the collateral. Much like a regular credit card, it has a revolving line of credit with a variable interest rate. Borrow from your home’s equity and repay on an as-needed basis during the initial draw period (which typically lasts up to 10 years). From there, you’ll repay what you owe, plus any outstanding interest.

Pros:

• Lower rates
• Interest-only payments during the draw period

Cons:

• Variable rates that can increase, or decrease, based on economic conditions
• Could wind up owing more on your home than it’s worth

Home Equity Loans

Much like HELOCs, home equity loans allow you to borrow against your home’s equity. Their main difference is that home equity loans provide a lump sum, a fixed interest rate, and a repayment term — unlike a HELOC’s revolving nature.

Pros:

• A fixed interest rate
• A predictable monthly payment
• Access to a lump sum loan at closing

Cons:

• Know a determined amount up front so you don’t end up borrowing too little or paying interest on unused excess
• Need between 15–20% of home equity (depending on the lender) to qualify

How to Choose the Best Option for Your Needs

Several personal factors can play into which option you choose. Here are some considerations:

• Need predictability? Fixed-rate options with home equity loans or cash-out refinancing are your best bet.
• If you’re planning to sell in a few years, a shorter-term home equity loan or HELOC might make more sense.
• Cash-out refinancing could cost more over time than a home equity loan or HELOC if your rate is already low.

How Home Renovations Impact Insurance

Before you make any hasty — and lasting — decisions, know the ways in which renovations can impact your insurance premium. For instance, adding square footage to your home, whether it’s a mother-in-law suite or sunroom, can increase your home’s resale value, meaning you’ll need to increase your coverage too. Installing a pool or hot tub raises the fun factor but also the liability concern.

Make sure your new investment is covered by talking through your renovation plans with your Agent. An annual 360 Review, a bird’s-eye view of your insurance policies, can help make sure you don’t miss anything else by filling in any lingering coverage gaps.

Renovations can enhance your home’s function and comfort. As you start tackling your home maintenance to-do list, learn how to vet home contractors.