Financing Your Home Renovation

You've been thinking of renovation your home for quite a while. After much discussion and careful consideration, you decide that it is indeed a sound idea. But major renovations can cost tens of thousands of dollars, so you'll also need to come up with a plan for financing the project. If you're somewhat short on disposable cash, here are a few options that you might consider.

Refinance your mortgage. If you’ve already built up a fairly good chunk of equity in your home, this can be an excellent choice to help you fund that major renovation. And if you currently have an adjustable rate mortgage, refinancing might be an especially attractive option right now, since interest rates have begun to rise somewhat. For example, if you want to borrow $35,000 to build an upstairs addition and you have $110,000 left to pay on your $200,000 mortgage, you can take cash out by refinancing your mortgage for $145,000. This would allow you to pay for the entire renovation up front. And depending on new loan's terms, your monthly mortgage payment might remain the same or even be less (the loan's payoff date would, of course, be extended). Furthermore, if you’re adding something structural (as opposed to simply redecorating) the lender may approve you based on the projected value of your home after the project is complete.

Get a home equity loan. This second mortgage – like the conventional first mortgage – is secured against your home, and is made available to you in a lump sum. The interest rate and monthly payment generally remain fixed throughout the term of the loan, which can be up to twenty years. Having a home equity second mortgage (obviously) requires a second loan payment in addition to your first mortgage and usually carries a higher interest rate than the refinancing option. However, the closing costs may also be considerably lower, making it a good choice if you need the money all at once but want to keep your fees down.

Obtain a home equity line-of-credit (HELOC). If you’ll be paying for your project incrementally, consider a HELOC. With this option, the lender makes available to you a specified amount of funds (your line-of-credit limit) that you can access as needed using a special credit card or checkbook. This makes it very easy to pay contractors as they complete various stages of the project. With a HELOC, you also typically have the option of making interest-only payments on the money that you use (for up to the first ten years of the normal twenty-year loan term; after the first ten years you'll be required to make principal-and-interest payments). This can make monthly payments lower than those of a home equity loan. HELOCs do, however, come with adjustable interest rates.

Use a personal loan or line-of-credit. If the renovation you're considering isn't too large, this option may be all that you need. Initial fees for personal loans and lines can be substantially lower than those for refinancing or borrowing against your home’s equity. But since personal loans aren't secured by your home, they generally carry higher interest rates. In addition, interest on mortgages and home equities is normally tax-deductible, while the interest you pay on a personal loan is not. As always, though, consult a tax professional for personalized advice.