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Renovating your home can be a great way to improve its look and value, but it can also be expensive. The cheapest ways to finance home renovation involve borrowing from your home equity. Home equity is the difference between your home’s value and mortgage balance. In most cases, you can borrow up to 85% of your home’s value at a low interest rate. If you’re unsure how to finance a home renovation project, don’t worry – a few options are available. In this article, we’ll compare four of the most common methods:

  • Taking out a home equity loan
  • Using a home equity line of credit
  • Cash-out refinancing your mortgage
  • Borrowing with a reverse mortgage

We’ll also help you decide which option is best for you.

Home Equity Loans

When you take out a home equity loan, you will receive a lump sum of money that you can use however you please. You will then make monthly payments on the loan until it is paid off. The interest rate on a home equity loan is usually lower than the interest rate on a credit card or personal loan, so it can be a good option if you need to borrow a large sum of money.

Advantages of using a home equity loan to finance a renovation project

  • Predictable payments.
  • Lower interest rate than credit cards and unsecured loans.

Disadvantages of using a home equity loan to finance a renovation project

  • Interest accrues immediately.
  • Higher interest rate than HELOC.
  • You could lose your home if you frequently miss payments.

Home Equity Lines of Credit

Unlike a home equity loan, which gives you a lump sum of money, a HELOC lets you borrow money as you need it, up to a specific limit. Your home equity and outstanding debt payments determine your maximum HELOC limit. With a HELOC, you can withdraw from the account whenever you need it. You will only be required to make monthly interest payments on the money you borrow, and you can repay the loan at any time.

Advantages of using a HELOC to finance a renovation project

  • Low interest rate.
  • Offered by many lenders.
  • Ability to make interest-only payments.
  • You have the flexibility to withdraw and repay as necessary.

Disadvantages of using a HELOC to finance a renovation project

  • Potential home foreclosure with missed payments.

Cash-Out Mortgage Refinance

If you have significant equity in your home, you may be able to refinance your mortgage and receive cash that can be used for a renovation project. With a cash-out refinance, you will take out a larger mortgage loan to replace your previous mortgage. The difference between the two loans will be given to you in cash, which you can use for your renovation project. Additionally, you can make changes to your mortgage agreement, such as extending the amortization to lower your monthly payments.

Advantages of using a cash-out refinance to finance a renovation project

  • Lowest interest rate option.
  • Potential to refinance into lower mortgage rates.

Disadvantages of using a cash-out refinance to finance a renovation project

  • High upfront costs.
  • Need to requalify for a mortgage.
  • Potential mortgage-breaking fees.
  • Potential to refinance into higher mortgage rates.
  • It takes the longest amount of time to receive funding.

Reverse Mortgages

With a reverse mortgage, you receive funding that doesn’t have to be paid back until you sell or move out of your home. Your lender will provide you with payment options varying from a lump-sum, recurring, or a combination thereof. They will build equity in your home with an interest rate that you must repay when you sell or move. To qualify for a reverse mortgage, you must have sufficient home equity and must be a homeowner exceeding 62 years of age.

Advantages of using a reverse mortgage to finance a renovation project

  • You don’t need to repay until you move or sell the home.
  • Ability to receive payments as lump-sum, recurring, or combination.

Disadvantages of using a reverse mortgage to finance a renovation project

  • High up-front costs.
  • Not many lenders are available.

Which Option is Best for You?

The best option for you will depend on your specific circumstances. A home equity loan may be the best option if you prefer a lump-sum loan with predictability. A HELOC may be better suited for you if you don’t need all the money upfront. A cash-out refinance may be the best option if you’re looking for the lowest interest rate possible and are willing to pay high upfront costs. Lastly, if you’re 62 years or older, a reverse mortgage could work well for you.

If you’re considering any option, remember that you’ll need equity in your home to qualify. In most cases, you can borrow up to 85% of your home value. This loan-to-value is the combined balance of your primary mortgage and potential home renovation loan. Lastly, remember that all these options require monthly payments except a reverse mortgage. Consistently failing to make payments can result in the foreclosure of your home.

The Bottom Line

Regardless of your choice, it’s important to remember that you’ll need equity in your home to qualify. The best way to determine which option is best for you is by considering how much money you need, the interest rates offered, and your current mortgage agreement. Whichever option you choose, consider the pros and cons to decide which is best for you and your home renovation project.