Financing Options for Remodeling Work
Last updated December 2021
You have several options to pay for your project. Cash certainly is the easiest: no applications, no forms, no appraisals, no debt, no interest. However, many homeowners borrow to cover large remodeling jobs. Financing options include:
Home equity loans are, in effect, second mortgages. They are fixed-rate, fixed-term loans that use the equity in your house as collateral. While easier to secure than traditional home mortgages, they still require an application, income and credit verification, appraisal, underwriting and approval, closing costs, and the like. Most lenders cap the loan amount at 80 percent of your home’s appraised value, though some will go beyond it for a higher interest rate. Interest on home equity loans is tax deductible (if you itemize deductions) as long as you use the money to substantially improve the home that secures the loan.
Home equity lines of credit (HELOCs) are similar to home equity loans in that they use your home as collateral. But HELOCs let you tap funds as you need them, rather than borrow the dollars all at once. If you’re planning a multistage remodel that will stretch over several months, a HELOC will let you borrow as needed. Most HELOCs carry variable interest rates, usually prime plus. As with home equity loans, loan amounts are typically capped at 80 percent of your home’s appraised value. Interest on HELOCs is tax deductible.
Cash-out refinances are popular among some homeowners with equity. With cash-outs, a lender pays off your old note and gives you a new one for a larger amount, with the difference becoming cash for you. Like home equity loans, cash-outs require a lot of paperwork. But interest paid is tax deductible, many lenders don’t charge substantial closing costs, and you effectively get to spread the costs of the remodel over the length of your long-term mortgage.
Federal Housing Administration (FHA) home improvement loans come in two basic forms. Title I loans let you borrow up to $25,000 at a fixed rate of interest and don’t require that you have equity in the house. Section 203(k) loans help homebuyers who want to rehab fixer-uppers: They’re fixed- or adjustable-rate loans that provide funds to both buy and rehabilitate a property. To use either program, you have to work with an FHA-approved lender.
Credit cards don’t require a lot of paperwork, but they usually impose higher interest rates than other financing options. On the other hand, if you need a very short-term loan, consider opening an account with a low introductory interest rate. The big benefit of paying via credit card is that you can dispute a transaction and request a chargeback if you’re not satisfied with the work and the contractor won’t make things right.