How to Finance a Home Renovation: Today’s Best Loan Options

Credit cards

Credit cards are convenient and ubiquitous. You probably have one within arm’s length right now. But are they a good idea for such a major expense?

“They’re the quickest way to get access to money,” Shaw says. “You can apply and be approved instantly and start using those funds even before you get the card, in some cases.” 

But while using a credit card is easy, paying it back can quickly become an upward struggle.

“They do come with higher annual percentage rates [APRs]. They can go up to 35% for someone with a lower credit score, or with higher balances on their existing credit cards.”

If your credit score is good, however, you could find a card with a 0% introductory APR for the first year or two. If you can pay off the renovation costs within that introductory period, it’s like having an interest-free loan. If not, you could be in for a whiplash-inducing shift from a 0% APR to one in the mid-20s or higher.

Personal loans

“Personal loans are what we specialize in at Acorn Finance,” Shaw tells us. “They’re beneficial because it’s really easy to apply.” They tend to cap out at around $40,000, and with strong credit, your APR will be in the 10%-20% range.

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Shaw mentions that, while your credit score will always have some effect on what financing offers are available to you, there are lending partners on Acorn Finance’s site that have loans for scores as low as 550, which is often categorized as “poor credit.” 

“The downside to that is they’re looking at rates that are 35% or even more,” which is similar to a credit card for someone struggling with their credit score. 

Personal loans are also fast. On the Acorn Finance site, you submit your financial needs and immediately see an array of lenders and their terms. You can get pre-qualified within minutes and have the money in your account within a day or two, pending approval.

Finally, personal loans are unsecured, meaning they don’t use your home as collateral. That makes the APR a little higher than secured loans, but you won’t lose your house if you can’t make payments.

Personal loans are also among the options Graham offers through his Airoom site. 

“As an industry leader, it’s important to provide funding solutions,” he says. When you’re looking for a contractor, their ability to offer financing is a good sign that the business is established and reliable.

Home equity options

If you pay a mortgage long enough, you can build up equity – i.e., the amount of your home’s value you actually own.

Current market value – remaining mortgage debt = equity

Owning equity in your home opens up new opportunities for funding.

“You can typically tap into up to 80-90% of the equity in your property,” Shaw tells us. “So if your home is fully paid for, and you’ve got a high-value home, you could see high six figures as the amount that you could borrow.” The loan comes in the form of a second mortgage.

These options are “secured,” meaning you are putting up your home as collateral. This lessens the risk your lender sees in you, so your APR will drop. “For someone with decent credit,” Shaw estimates, “the home equity APR you might be looking at is 7-9%.” The interest rate is always changing, but the APR on an equity option will be lower than that of an unsecured personal loan, and lower still than a credit card.

The downside is that, if you fail to keep up with your payments, your lender could take your home. 

Let’s look at three types of home equity options: home equity loan, home equity line of credit (HELOC), and cash-out refinancing.

Home equity loan

You receive these loans in a lump sum and pay them back monthly as a second mortgage alongside your current one.

If you have $200,000 in home equity, a loan allowing you to borrow 85% of that could get you a lump sum of up to $170,000. 

Using a home equity loan for home improvement might even improve the terms of your loan. Shaw explains: “If you say, ‘I’m putting a new roof on the house,’ or ‘I’m fixing a hole or an HVAC system,’ the lender will look at that more favorably because they’re investing in the property as well.”

Graham notes that many of the home equity options he offers “are based on the as-complete value of the improvement.” You can leverage your home’s value to improve your home’s value.

Home equity line of credit (HELOC)

The major difference between a home equity loan and a HELOC: Instead of a lump sum, a HELOC is a revolving line of credit from which you can borrow as much or as little as you need, usually over the course of ten years. You can even pay back what you borrow and then borrow it again. It’s like using your home as a credit card. This offers flexibility.

“HELOCs are really good for home improvements,” Shaw says. You’d have access to that $170,000 from the previous example, but only as much as your budget needs. If your project costs more than you expected, you can keep borrowing from the same line of credit.

A broad rule of thumb is that home equity loans tend to be fixed-rate, so the APR doesn’t change over the course of your repayment, while a HELOC tends to be variable, with your APR changing with the market. This results in a rare, but possible, snag.

The rates could change and, depending on your home value, the bank may see the equity has gone down in your area, and they might want to redo some of the terms of the loan.” The line of credit you’ve already signed on for may be damaged if the market value in your area plummets. “It doesn’t happen too often, but we have seen it..

Josh Shaw
Contractor Advisor

Cash-out refinancing

This is a way to leverage equity that doesn’t result in a second mortgage, but creates a brand new one, covering what you currently still owe plus extra cash you’d like to pocket. Your mortgage payments will now repay that cash as well as continue to pay for your home.

Using the above example again, you could get up to $170,000 in cash, and whatever amount you take will be added to your mortgage payments.

How much equity to borrow

One thing to keep in mind for these home equity options: You don’t have to borrow the full amount. That $170,000 from the above examples might be way more than you need. Plan well and leave some wiggle room in case your project goes over budget.

Graham says there are a couple of reasons a project might go over budget. “First, there’s the client.  As people get more comfortable with making improvements, they allow themselves permission to make their project more personal. They may choose to add work to the scope.

“Second, there is always the possibility for hidden or unforeseen issues or the repair of neglected items that have outlived their usefulness.”

The 2022 Houzz & Home Overview of U.S. Renovation says that a project takes an average of nine months, with planning taking nearly twice as long as the actual construction. Part of that planning is nailing down a budget, and since a HELOC’s flexibility allows you to borrow (and pay back) as much or as little as you need, it might remove some of the budgeting stress.

Government home repair assistance programs

The United States Department of Housing and Urban Development (HUD) offers a couple options to help with home repairs and modifications. HUD does not pay out these loans themselves, but the loans can be obtained through approved lenders.

203(k) rehabilitation mortgage insurance program

The 203(k) is a government-insured, fixed-rate mortgage for home improvement. This money arrives as a refinance of your existing mortgage through a government-approved lender, or as a new mortgage if you’ve paid off your home. There are two versions. The “limited” version makes up to $35,000 available to homeowners for upgrades. It’s great for smaller projects, like plumbing repairs or cosmetic remodeling of your kitchen.

The “standard” version is for larger projects like structural repair or full kitchen remodels. There is no upper limit on the amount, but it has a minimum of $5,000.

Title I property improvement loans

These loans “must substantially protect or improve the basic livability or utility of the property,” so they are not intended for cosmetic upgrades or luxury items. 

Tip

No collateral is required if the loan is under $7,500. You must secure any loans over that amount with your mortgage or a deed of trust. Maximum loan amounts are between $25,000 and $60,000, depending on the number of units in the residential property. The loan is fixed-rate, and the repayment schedule can be anywhere from six months to just over 20 years.

How can Acorn Finance help? 

You deserve a home you’re happy in. Home improvements can be overwhelming — and so can finding your perfect financing options. 

Acorn Finance can streamline your search by showing you a selection of high-quality lenders and loan offers you’re already pre-qualified for. Select one that fits your needs, and start making your house a dream home.