5 Ways to finance your home improvement projects

Refis and HELOCs sound like something you would find in a sci-fi adventure, but they’re actually two ways you can finance your next home improvement. The best way to finance your renovation, though, depends on your budget, project timeline and the size of your project. After talking with the experts, we’ve outlined some common financing methods to get you started.

Cash-out refinance

Sometimes called a “refi,” cash-out refinancing takes your existing mortgage loan and essentially turns it into a larger loan with payment spread out over time. This allows you to consolidate other debts into a fixed payment. Check the current refi interest rate to ensure it’s lower than your current mortgage rate, and be aware that a 30-year payment span means that you’ll possibly accrue more interest than with a short-term, higher-interest loan.

Pros:
Possibly lower interest rate
Fixed interest rate
Ability to consolidate mortgage and new addition

Cons:
Payments are over a 30-year span
Interest rate might be higher than current mortgage, depending on market

Home equity loan

A home equity loan remains separate from your existing mortgages, drawing on your home’s current value. Home equity loans can offer you the large amount you need for an extensive improvement project, but it takes time. “When you get a real estate loan, the timeline is longer because there are valuations that we have to order to show the property is worth a certain amount,” explains Deborah Manfred, Vice President of Real Estate at Credit Union 1. But, if you’re planning a large remodel, and have built up equity in your home, you might have an easier time securing a large home equity loan than an unsecured loan, Deborah adds.

Depending on the amount you need for your project, you also can use equity from your other assets, says Kristi Dent, a Consumer Lender with Northrim Bank. This equity could come from your vehicles or even rental properties. Another bonus for home equity loans is that they are at fixed interest rates, which offers you security with your payments. “Those payments are fixed for up to 180 months or 15 years,” Kristi explains. “You get to choose a term, so you can also decide what’s best for your budget.”

Pros:
Lower interest rate
Allows for large lump sum
Fixed interest rate and set monthly payments
Tax deductible interest

Cons:
Takes time to evaluate property and assets
There are closing costs

Home equity line of credit

Also known as a HELOC, this option does not offer up a lump sum, but instead gives you the ability to withdraw an amount up to a set limit. Deborah explains it simply: “Basically, it’s like a big credit card. So, even if you apply for a line of credit for $100,000 but you don’t need the whole $100,000, then you don’t have to use it.” And, like a credit card, you only pay interest on the amount that you borrow. As an added bonus, you can often get a higher loan amount and lower interest rate with a HELOC, adds Deborah, since HELOCs are secured by your real estate.

Usually for the first 10 years of a HELOC, the minimum payment required is just interest. On one hand, this allows you to have flexible payment if your budget is tight right now. On the other hand, Kristi says, this means that your loan is accruing interest over those 10 years, increasing your overall amount owed.

Interest paid on both HELOCs and home equity loans – if they are used for home improvements – is tax-deductible up to a certain amount. Check with your lender or consult with a tax preparer about these details, since some details have changed with the recent tax overhaul.

Pros:
Can acquire large funds
Can make multiple withdrawals over time
What you don’t use doesn’t accrue interest
Interest-only payments at first
Lower interest rate
Interest paid is tax deductible

Cons:
Takes time to evaluate property and assets
Closing costs
Variable interest rate

Personal loan

If you’re in the position to get a large enough personal loan, this can speed up your building process, since you don’t have to wait for appraisal of your property. “With a personal loan or a credit card, generally someone can get a loan, or at least get an approval the same day and get the funds a lot quicker,” explains Deborah. Watch for variable versus fixed interest rates, and look into different payment lengths to see if this is the best option for you.

Pros:
Lower interest rate than a credit card
Fast and easy

Cons:
Might be more difficult to get enough funds to finance a large project
Generally higher interest rate than HELOC or home equity loan

Credit cards

Similar to personal loans, credit cards offer quick approval, so you can renovate right away. The downside is that the interest rate is typically much higher than loan options. However, credit cards do often have promotional deals where the first year or so has 0-percent interest. Deborah says she has even had clients pay for their construction with a credit card and then take out a home equity loan to consolidate debts. When you do this, though, your payment on your home equity loan might not be tax deductible like it would be if you took it out initially for your home improvement project.

Pros:
Fast and easy
Zero-percent interest promo deals available

Cons:
Interest rates can be much higher
It might be difficult to get enough credit to finance a large project

Words of advice

Financial institutions like Credit Union 1 or Northrim Bank often have promos going on where you can have especially low interest rates for an introductory period, says Kristi. Shop around for these specials and keep in mind your accruing interest when deciding on payment options. Opt for fixed interest rates when possible to avoid fluctuating rates and accruing more interest with a longer pay-off period.

It’s easy to go to your financial institution and ask them for a loan, but – like when choosing your contractors – it’s important to search for varying options and rates. Ask friends where they’ve gone, if they had a positive experience. Some financial institutions will have lower interest rates, fees or more flexible payment options; ultimately, you have to figure out what you’re comfortable with to make the best financial decision for your project and budget.