Your house is more than just a place to live—it's also a reflection of who you are, your tastes and your aspirations. And as you look around your home, you might find yourself daydreaming about new possibilities: a gourmet kitchen for entertaining, a spa-like bathroom for relaxation or a quiet home office so you can work in solitude. To attain that vision, many homeowners are deciding to remodel their home, particularly in light of higher mortgage interest rates that can make it more expensive to move.1
Before putting your ideas into action, you'll need to consider how to fund the transformation. Fortunately, there are various financing options to suit your unique situation and goals. Here are some options to consider.
1. Cash/savings
Setting aside funds up front can give you peace of mind and allow you to avoid fees associated with borrowing money. So kudos to you if you've been stashing cash in investment vehicles like a high yield savings account, money market account or certificate of deposit (CD), all of which also allow your money to grow, thanks to their competitive interest rates.
If you're just beginning to consider your home renovation, now's a good time to commit to saving funds for this goal. By automating your savings, that money is diverted directly into a specific account rather than landing in your general account—meaning you can avoid the temptation of spending it on a whim.
Even if you have an existing account, consider opening a separate, project-specific savings account, which can make it easier to track expenses and ensure you're not inadvertently spending money that should be earmarked for other bills. Look for a savings account that offers low fees and a high interest rate to get the most bang for your buck.
2. Credit Card
Rack up rewards by using a credit card that offers perks, such as cash back. If you're opening a new account, take notice of the interest rate, the benefits offered and other factors to make the right choice for your financial situation and expected needs. For instance, the Synchrony HOME™ Credit Card has no annual fee, and you can shop at thousands of retailers nationwide and take advantage of promotional financing.
3. Personal Loan
A personal loan is often used to finance a major one-time purchase, making it ideal for remodeling projects. Consider a personal loan if the amount you need to borrow is higher than your credit limit or you worry you may not be able to pay off your balance in a timely manner. A personal loan often has a lower interest rate than other types of loans, including credit cards.
4. Home Equity Loan
If you've owned your home for a while, you have likely accrued equity, which is the amount of money you've already paid in regular mortgage payments, compared with how much the home is worth. With a home equity loan, a lender provides you a percentage of that as a fixed-rate loan that will have designated payments each month in addition to your regular mortgage payment. The interest rate is likely to be slightly higher than a standard mortgage rate, but you won't have to cover closing costs, as you would with a refinance.
These loans are popular options: According to ServiceLink's 2023 State of Homebuying Report, 44% of homeowner respondents plan to take out a home equity loan this year, with 73% of those planning to use the funds for home improvements.2
5. Home Equity Line of Credit (HELOC)
A HELOC is also based on the equity you have in your home, but it's different from a home loan in that you aren't taking out a lump sum of money. Instead, you'll have a designated amount available as a revolving line of credit you can tap into as needed, which means you'll only pay interest on the funds you're using at any particular time.
This flexibility makes it appealing for home remodels because often you're not sure how much or when you might need funds. With a HELOC, the funds will be waiting, but you'll only be paying interest on the amount you're actively using.
6. Federal Housing Administration (FHA) Title 1 Loan
This type of loan, available from an FHA-approved lender, is available to homeowners who don't qualify for a traditional home equity loan. This search feature can help you find a qualified lender, who can walk you through the qualifications and details.
7. HomeStyle® Renovation Mortgage
Often used by new homebuyers who intend to fix up their purchase, a HomeStyle Renovation mortgage can also be used for upgrades as part of a refinance of an existing mortgage. The HomeStyle mortgage offers a convenient way to make renovations, repairs or improvements and roll them into your refinance, rather than requiring you to use an additional financing method.
It's important to first find out the current interest rate on your mortgage, as most homeowners today have interest rates that are lower than the rate you would be offered as part of a refinance. With this type of loan, you'll need to have an established plan and a contractor, who will submit the plans and be paid in a series of draws from an escrow account held by the lender.
8. FHA 203(k) Loan
Similar to a HomeStyle Renovation mortgage, an FHA 203(k) loan is available as part of a refinance. This loan also requires that you have a definite plan and a contractor lined up, who will be paid by the bank when certain milestones are reached.
9. 401(k)
Many 401(k) plans allow you to borrow against the money you've already saved, up to certain amounts. However, in most cases, this should be your last choice for financing a home remodel. That's because, even though you're technically borrowing from yourself and subsequently paying yourself back, you'll be using after-tax dollars—which means you're missing out on the tax advantages of a 401(k). You'll also be forgoing the compound interest the money might otherwise earn, potentially putting your retirement funds in jeopardy.
Should you decide to tap your 401(k), pay close attention to the payback period; if you fall outside the guidelines, it will be considered a “withdrawal," which comes with a host of penalties. You also may need to pay back the entire amount in a short time frame if you leave or lose your job unexpectedly. All of these drawbacks make it a risky way to fund a home remodel.
Tips to Help Keep Costs Low
A penny saved is a penny earned, so any place you can save money on your remodel—while never cutting corners on safety—can put your dollars ahead. Here are four ideas to consider:
- • Determine if there are parts of the project you can take on yourself. While you never want to DIY something outside your skill set, see if you can take on some of the time-consuming tasks that don't require special expertise, such as painting, assembling modular cabinets or installing knobs and pulls.
- • Swap services with a handy friend, family member or neighbor. Maybe they can help you paint your kitchen in exchange for you planting their spring garden or catering their next dinner party.
- • Scroll community sites, like Meta/Facebook Marketplace or your local Buy Nothing group, to find neighbors who are getting rid of carpet remnants, extra tile or other materials you can repurpose.
- • Shop resale stores. In particular, see if your area has a Habitat ReStore, which accepts donations of household items and building materials. Shoppers can often find great deals while supporting Habitat for Humanity at the same time.
Make Your Dream Home Renovations a Reality
A home remodel can be an excellent way to elevate your living space, while potentially building additional value for its eventual resale. By carefully considering all your financing options, you can find the one that's best for you.
Cathie Ericson is an Oregon-based freelance writer who covers personal finance, real estate and education, among other topics. Her work has appeared in a wide range of publications and websites, including U.S. News & World Report, MSN, Business Insider, Yahoo Finance, MarketWatch, Fast Company, Realtor.com and more.
READ MORE: Are You Overspending on Your Home Improvement Project?
1. Bahney, A. US mortgage rates climb to their highest level since November. CNN. June 1, 2023.
2. ServiceLink Survey Reveals Optimism Among Today's Homebuyers Despite Challenging Market Conditions. ServiceLink. May 9, 2023.
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