A important stage in the process is choosing how to pay for a home renovation project. There are various ways to fund a home remodel, including options that employ your property's equity as well as nonequity options like personal loans and credit cards.

Here are seven home remodeling financing options and when they are best used.

Using Equity to Renovate

Borrowing against home equity means either modifying your current mortgage or taking out a second mortgage and using the proceeds to fund the remodel.

Interest rates on this type of financing are usually in the single digits, and interest paid on home equity loans or lines of credit is tax-deductible if used for home improvements.


For equity lending, a home evaluation is required, and you may be asked to pay closing costs. It also utilizes your home as collateral, which means that if you do not make payments, the lender has the authority to seize your home.

Home Equity Credit Lines

A HELOC is a credit line that can be used whenever it is needed. You pay interest only on the amount received.

HELOC limits might be as high as 85% of your home's value minus your mortgage balance. Because interest rates are frequently fluctuating, monthly payments vary as the rate changes. A HELOC typically permits you to use the funds for 10 years and repay the amount over 20 years.

When it's at its best: If you don't know how much the remodeling will cost, the ability to withdraw funds as needed makes a HELOC ideal.

Loans for House Equity

A home equity loan, like a HELOC, allows you to borrow up to 85% of the value of your home that is less than what you now owe. The distinction is that you receive the money in one lump sum and return it over a period of time that is usually 15 years or less. These loans have fixed interest rates and monthly installments.

When it is at its peak: Because home equity loans are fully funded at the onset, they are best used when the total cost of your repair job is known.

Cash-Out Refinance

Your current mortgage gets replaced with a larger one with cash-out refinancing. The difference between your current mortgage debt and the new, larger loan is paid to you in cash, which you use to fund your renovation project.

When it works best: Cash-out refinancing is good if you need a large loan to repair a long-term home. Ideally, the new mortgage will have a lower interest rate than your current mortgage.

Paying for a Renovation With No Equity

Cash

Many homeowners pay for improvements in cash, ensuring that the work is done without incurring interest.

Jovan Johnson, a certified financial planner in the Atlanta region, says he saves money each month for future home improvement projects and maintenance.

For do-it-yourself and other projects that do not require a complete payment upfront, breaking up payments over the course of the remodeling helps fit the project into your budget.

When it works best: Use cash only when it does not conflict with other financial goals or lead you to go over your monthly budget.

Personal Loans

Unsecured personal loans may help homeowners finance a project fast. Unlike home equity loans, which require time-consuming underwriting and appraisal processes, most lenders may fund a loan within a week.

Personal loans have interest rates ranging from 6% to 36%, which is more than the majority of home equity options but lower than some credit cards. Home repair loans are available for individuals with poor credit (scores below 630), but the best rates are reserved for clients with good to excellent credit.

Most personal loans have repayment terms of two to seven years. A shorter term raises your monthly payments, whereas a longer term raises your total interest expense.

Many online lenders offer pre-qualification, which allows borrowers to compare potential interest rates, loan amounts, and monthly payments. Because these loans come in a lump sum and are returned in fixed amounts, you can plan for them in your monthly budget.

When it's at its best: Personal loans are excellent alternatives for urgent repairs or projects that must begin immediately because they are funded swiftly. They can also be used to fund larger projects in situations when borrowing against equity is not an option.

Credit Cards

Pick a credit card with a 0% APR for minor home improvements that you can pay off within the interest-free period, which is typically 15 to 18 months. To be eligible for these cards, you must have good or excellent credit (a credit score of 690 or higher).

Some credit cards provide rewards for specific purchases, such as home renovation costs. Retail cards may also offer special financing or incentives, which may be beneficial if you purchase the majority of your goods from the same store.

When it's at its best: Credit cards can assist you in completing small DIY or short-term projects that do not exceed a few thousand dollars.

Government Loans

The government makes Title 1 loans available to qualified borrowers who want to make specific housing modifications, such as purchasing appliances, making their home more accessible, or improving its energy efficiency.

You can borrow up to $25,000 for a single-family home, with repayment durations ranging from six months to twenty years.

Title 1 loans over $7,500 require your home as collateral. Before you can borrow, you must also be a resident of the home for at least 90 days.

All lenders do not offer government loans. Look for a lender in your state on the Housing and Urban Development lender list.

When it's at its best: If your project is eligible for this type of loan, it could be used to fund all or a portion of it.