Whether you’re hiring a professional for the job or you’re handy enough to DIY, home improvement projects can cost a pretty penny.
When it comes to saving money, paying in cash is always the way to go – but that’s not in the cards for most. Chances are, you’ll need a bit of financial assistance if you’re making a major improvement to your home like adding a swimming pool, building a deck, or upgrading your bathroom that’s still stuck in the ’70s.
As with any big financial consideration, you should always scope out your options to see what makes the most sense for you and your budget. So – what are your choices for financing home improvement projects?
5 Ways to Pay for Home Improvements
Paying in Cash
Paying for home improvements with cash is a great way to avoid running up debt, but it’s not always a reality for everyone. With that said, smaller home improvement projects like painting, re-flooring, or installing a new front door could be costs you could handle without additional financial help. Even minor renovations like these can bring a surprisingly remarkable upgrade to your living space.
For anything larger or more expensive than the examples above, you’ll likely want to consider moving forward with one of the options we cover next.
If you have the available credit for it, using a credit card to finance your home improvement projects provides a quick and easy way to cover the expenses. If your card offers it, cashback rewards and points can sweeten the deal too – but there’s one thing you have to keep in mind if you’re considering this option.
Before you start swiping, it’s crucial to know the interest rate and fees associated with your card. If you’re paying for major home improvements, a high-interest credit card could accumulate interest that takes a long time to pay off – and the rewards gained won’t even be close to worth it.
A credit card offering a 0% APR promotion could be an excellent financing choice, given you have the income to repay the balance before the promotional period ends. As you may already know, once the promotional period ends your rates hike back up to normal – and you don’t want to get stuck paying all that interest.
So, if you want to use a credit card to handle home improvement expenses, make sure you can borrow the money you need at a low-interest (or no interest!) rate. The lower your rate, the faster you’ll be able to repay what you owe and actually enjoy your newly upgraded home.
Read more: Best and Worst Ways to Use Credit Cards
HELOCs and Home Equity Loans
A Home Equity Line of Credit, also known as a HELOC, is a revolving loan that allows you to borrow against the equity you have in your home. Home equity loans let you tap into your home’s equity as well, but unlike HELOCs, they’re non-revolving – much like your typical personal, auto, or student loan.
A quick note before we get into HELOCs and home equity loans: If you don’t have equity in your home, unfortunately, these aren’t options you can consider.
While HELOCs and home equity loans have their share of benefits, there are a few serious risks you’ll have to take into account as well. To start, HELOCs and home equity loans are secured by using your home as collateral. This means that when you accept the loan, you also accept that your home could be foreclosed on if you’re unable to repay your lender.
It’s quite a risk to take. If putting your home on the line to pay for home improvement projects is a dealbreaker, it’s completely understandable – but secured loans do come with one noteworthy benefit.
Because both HELOCs and home equity loans are secured, the interest rates are typically lower than other financing options. According to Bankrate, in September 2020 the average HELOC rate was 4.55%, while the average rate for home equity loans was 5.11%. With credit card rates hovering around 16.02% at the moment, it’s clear to see the savings potential HELOCs or home equity loans provide.
One more thing to keep in mind: If time is of the essence for your home improvement project, HELOCs and home equity loans can take between 14 – 45 days to get funded – which may be a bit longer than you’d prefer if you’re ready to get things started. If fast funding is something you’re searching for, look no further than the next option we’re about to cover.
Home Improvement Loans
Home improvement loans are personal loans that can be used to fund projects both small and large (ranging anywhere from $2k – $50k) around your house.
Read more: How Home Improvement Loans Work
When compared to the other options we’ve mentioned, home improvement loans have a number of benefits over the competition. The applications are generally short and simple, they tend to offer higher loan amounts than credit cards, you don’t need equity in your home to take one out, and they’re unsecured (don’t use your home as collateral.)
Because home improvement loans usually have fixed interest rates, you’ll know exactly how long it’ll take you to pay off the loan – which is a major plus if you prefer predictability when it comes to financing options. With average interest rates as low as 10.3% for those with good credit, you could save much more in interest by moving forward with a home improvement loan over a credit card.
And, unlike HELOCs and home equity loans, you could get funding in as little as one day – so you won’t have to wait long to start turning your home improvement dreams into a reality.
What should I use to fund my home improvement projects?
Ultimately, your credit history, income, preferences, and the projects you have in mind all play a role in deciding the right funding option for you. We’ll give you a few tips here to help you narrow your choices down:
Lowest Interest Rates
If you can afford it, paying for home improvements with cash is the way to go. Other than 0% APR credit cards, any other option will cost you additional money in interest – though the rates vary greatly.
In general, HELOCs and home equity loans have the lowest interest rates, credit cards have the highest interest rates, and home improvement loans are somewhere in the middle. Having said that, the rates you receive depend on a variety of factors, so it’s wise to treat this as a rule of thumb.
When it comes to low-risk financing, cash is once again king – but not everyone has the means to pay for home improvements this way. Because both home improvement loans and credit cards are unsecured, they’re less risky than HELOCs or home equity loans, but they can still negatively impact your credit if you don’t repay according to the terms.
A saving grace of home improvement loans (when it comes to riskiness) is that they’re funded in one lump-sum. In other words, you get the money you need all at once and can’t take out more without applying for another loan. Credit cards, on the other hand, let you take out as much money as your credit limit allows, making it much easier to fall into mass amounts of debt. With a credit card, you also lose the structured repayment plan home improvement loans provide.
And, of course, HELOCs and home equity loans could be considered the riskiest out of these options. If you’re unable to repay your loan, your home could be foreclosed on – and we don’t need to tell you how major of a consequence that is.
Making major improvements to your home is a major financial decision, so take the time to consider all of your options and choose the one that’ll work best. Once you decide what’s right for you, it’s time to choose which project you want to get started on first. If you want a hand picking a project, visit our resource linked below!