How to Finance Major Home Renovations


If you’re planning to make some major home improvements, you may be tempted to skip to the part where you start deciding which improvements to make. However, before you can skip to the exciting part, it’s important to ensure your finances are in order. The big question that most homeowners ask is, “How to finance major home renovations?” This is a crucial and valid question because the average major home renovation can cost thousands or tens of thousands of dollars, depending on which area of your home you’re renovating. If you’re wondering how to finance major home renovations, this article details how people can save money or accumulate or distribute funds for larger home renovations.

Start Saving Ahead of Time

They say cash is king, so if you have enough savings lying around, using these savings is the best solution to how to finance major home renovations. If you’re not in a hurry to complete your renovation projects, you can start putting aside funds specifically for this purpose. As always, you should start by creating a budget, and this forces you to break down your projects into bite-sized pieces. For instance, if you have a major kitchen renovation planned, you can breakdown your budget to cover things like purchasing new energy efficient appliances, installing granite countertops, implementing a new kitchen cabinet design, etc.

The only downside of using your savings to pay for major home renovations like hiring a roofing contractor is that the timeline for completing your projects will be longer. Since major renovations require a substantial investment, it might take you a while before you accumulate enough funds to achieve your goals. On the flip side, using your savings is the best solution when it comes to how to finance major home renovations. That’s because you don’t have to take out a loan or accrue any interest, and your credit score is not impacted in any way.

Take Out a Home Improvement Loan

A home improvement loan is a type of unsecured loan, meaning you can get the funds you need without having to offer some kind of collateral. However, keep in mind that since you’re not providing security for the loan, the lender faces a greater risk, so they will charge a higher interest rate for unsecured loans. If you have bad credit and your application is approved, you’re more likely to receive a higher interest rate than someone with an excellent credit score. In addition, there may also be limitations on the amount you can borrow. Generally, a home improvement loan should be able to finance most mid-sized renovations.

Whether you’re looking to purchase a new air conditioner, pay for HVAC service repairs, install residential driveway paving, or hire a roofing contractor, the good news is you can receive the loan amount in a relatively short period of time once your application is approved. That means you can kickstart your renovation projects at an earlier date compared to waiting for your savings. If you want to get the best deal on your home improvement loan, be sure to compare as many options as possible and consider factors such as interest rates, repayment terms, loan fees and charges, turnaround times, maximum borrowing limits, and more.

Take Out a HELOC

A HELOC is a home equity line of credit which is a type of secured line that’s backed by your home. That means you can only apply for a HELOC if you’re a homeowner. Unlike other types of loans, such as a home improvement loan where you receive a lump sum, a HELOC is also revolving credit, meaning you have a borrowing limit, and you borrow any amount you want up to that limit. In addition, you only pay interest on the amount you borrow. The main benefit of taking out a HELOC is that you can enjoy higher borrowing limits, so it can be the perfect answer to how to finance major home renovations.

The higher borrowing limits are because putting your home up as collateral reduces the lender’s risk. Another benefit of taking out a HELOC loan is that it generally comes with lower interest rates than unsecured loans. You can also get flexible repayment terms of up to 10 years or more, which enables you to spread out the cost of major home improvements like HVAC service.

The downside of taking out a HELOC is that this type of loan often comes with variable interest rates, so your budget and repayments can be affected if the interest rates keep fluctuating. In addition, the revolving credit means you always have access to borrowed funds, and you might be tempted to borrow more than you can afford. This puts you at risk of losing your home since the lender has the right to seize the collateral you put up if you default on the loan.

Take Out a Home Equity Loan

A home equity loan is not to be confused with a HELOC, especially since a home equity loan does not provide revolving credit. Instead, a home equity loan allows you to borrow back some of the equity you have built in your home, which explains why it’s also called a second mortgage. You receive the funds as a lump sum, and you can start paying back the loan via monthly repayments with interest on top until the end of your loan. A home equity loan is also a type of secured loan where you put up your home as collateral. The biggest benefit of a home equity loan is you can enjoy more flexible borrowing limits, and you have a longer repayment period, which makes your monthly installments more affordable.

Take Out a Hard Money Loan

If you’re a homeowner looking for other borrowing options to help pay for repairs and renovations, you can consider taking out a hard money loan. Simply put, a hard money loan is a short-term loan that’s typically used to purchase hard assets, such as real estate. These types of loans are common in the real estate industry, and most realtors are familiar with how they work. You can’t get a hard money loan from a bank or a traditional financial institution. Instead, these loans are provided by private investors and usually come with less paperwork and faster access to funds, even if you have bad credit.

As mentioned, most people use hard money loans to purchase homes so they can flip them and make a quick profit, but it’s possible to use a hard money loan to renovate your main home. Using a hard money loan to renovate your home makes sense if you’re planning to pay the money back quickly since hard money loans have short repayment periods and high interest rates. You should be aware of the potential to lose your home should you default on your loan.

Use Credit Cards for Minor Purchases

Credit cards are not usually the best option for homeowners that are trying to figure out how to finance major home renovations cost-effectively. That’s because credit cards tend to have higher interest rates than unsecured personal loans. The other disadvantage of using a credit card is that you can end up trapped in a vicious debt cycle if your debt keeps piling up due to higher than average interest rates. That said, there’s a way to use credit cards smartly. The best way to use a credit card to finance major renovations is to take out a credit card with a 0% introductory rate.

That means you can pay for minor expenses related to your renovations using your credit card, and you won’t be charged interest for the money you borrow. It’s especially handy for covering unexpected expenses that you didn’t budget for. However, you should note that the 0% introductory rate only applies for a certain period, and once the promotion expires, a higher interest rate will kick in for any amount that you still owe on the card. So the trick is to make sure you’re all paid off by the time the 0% introductory rate ceases to apply. The benefit of taking out such a card is that you can enjoy interest-free funds and build your credit score at the same time as long as you make payments on time. Some credit cards also come with cashback perks that you can fully enjoy.

Opt for a Cash Out Refinance

With a cash out refinance, you’re basically replacing your existing mortgage with a new mortgage. When you apply for a new mortgage, it’s possible to apply for a larger loan. This allows you to pay off your existing mortgage while leaving you with extra cash in your pocket that you can then use to cover some major home additions, such as a home addition or a full kitchen renovation. A cash out refinance only makes sense if you’re able to get the new loan at a lower or reasonable interest rate. You should also make sure you can afford the newer loan to avoid putting yourself into more debt.

Take Out a Home Insurance Claim for Emergency Home Repairs

If you have home emergency cover, you have another solution for how to finance major home renovations. Home emergency cover is a type of insurance that provides the coverage you need in case you encounter a specified home emergency. For instance, if a tree falls on your roof, your insurance provider will cover the cost of hiring a local roofing service to fix the issue. Similarly, if you need to pay for a foundation repair service or window replacements, you can submit a claim, and this can save you from borrowing money. However, in most instances, your claim can only be approved if you have met the deductible and the repairs are covered in your policy. Sometimes, it can take a while for your claim to be processed, so there might be a waiting period before you can start with your emergency home repairs.

Borrow From Family and Friends

If other options for how to finance major home renovations don’t appeal to you, you can always consider borrowing from the bank of family and friends. When done right, you can borrow from your parents, favorite aunt, or another close relative or family friend at a much lower interest rate than you would get with a traditional bank. Because you have a close personal relationship with your lender, you can easily negotiate a lower interest rate, and this makes the loan more affordable. You can also arrange a flexible payment arrangement that suits both parties. The important thing is to enter into an agreement that doesn’t disadvantage the other party if you want to avoid straining your relationship.

For instance, the person lending you money should also benefit from the deal. If they have savings just sitting around, they can achieve a better rate of return than what they’re getting from their current investments. You should also avoid being casual about the arrangement. Instead, treat it like a typical bank transaction where you have to sign the loan paperwork that outlines the terms and conditions of the loan, such as the repayment schedule and your responsibility as a borrower. If you’re not sure how to navigate this part of the process, you can always hire a legal professional to help you draft the necessary paperwork. That way, you will be on your way to completing your foundation repair service, or whatever other service you require.

These are some of the top ways to finance a major home renovation. If you have been trying to figure out how to finance major home renovations, it’s essential to evaluate your situation to decide on the best option. For instance, if you have bad credit, you might not be able to get approved for a loan, so it might be a better idea to work on improving your credit score and increasing your savings. You can also borrow from family and friends if they are open to the idea. Once you have arrived at the best answer for how to finance major home renovations, continue to plan carefully so that you can stay in control of your finances from start to finish.

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