If you want to borrow money to fund home improvements, there are a number of options available to you. Some apply only if you have equity in your home you can borrow against, but there are other options to consider as well.
Equity-Based Home Improvement Financing
If you have enough equity in your home to cover the cost of home improvements, you may want to consider an equity-based loan. These options typically have lower interest rates than other options and can offer tax benefits. However, these options may come with costly closing costs.
Home Equity Line of Credit (HELOC)
If you are planning to take your time with your home improvements, such that you will need a steady flow of cash rather than a lump sum, a home equity line of credit (HELOC) can be a good option. You will only pay interest on the outstanding balance as you go.
Second Mortgage/Home Equity Loan
If you have enough equity in your home to cover the cost of the home improvements and you'd benefit from accessing the funds in a lump sum, a second mortgage, also known as a home equity loan, may be the best option for you. Keep in mind, though, interest will begin accruing on the full balance immediately.
Cash-Out Refinancing
If you have a good bit of equity in your home but would prefer to avoid adding on a second payment, you may want to consider cash-out refinancing. There are a number of pros and cons to cash-out refinancing. This is a good option if mortgage interest rates are lower now than when you took out your original mortgage and you need access to a lump sum of cash to pay for the home improvements. You can seek a cash-out refinance for a second mortgage or a first mortgage.
Reverse Mortgage
This option is available only to homeowners age 62 or older. With a reverse mortgage, you can convert the equity in your home into cash. You can get a lump sum or receive monthly payments, and you don't have to make payments on the funds you receive, as long as at least one of the borrowers is living in the home. You can use the proceeds for home improvements or any other purpose. The loan becomes due when all the borrowers listed on the loan move or pass away. This can be a good option for older adults who don't plan to leave their home to heirs.
Other Home Improvement Borrowing Options
If you don't have much equity in your home or you would prefer to avoid a mortgage product as a way of funding home improvements, there are some other options to consider.
Personal Unsecured Loans
An unsecured personal loan can be a good option for homeowners looking for cash to fund improvements. According to Bankrate, some banks and credit unions underwrite unsecured loans specifically for home improvement purposes. Lenders that don't have products designated for home improvement expenses often offer general personal loans you can use for any purpose. These loans are a good option for homeowners who need a relatively low amount they can pay off quickly or who don't have equity. You will need good credit or a creditworthy co-borrower to qualify.
Contractor Financing
Some contractors offer same-as-cash financing to customers who hire them to complete home improvements. If you're interested in this option, look for a contractor who is a member of the Certified Contractors Network (CCN) or a similar professional organization. While not all members participate, this is a good place to start narrowing your search. These loans are typically set up as 180 days, same as cash. At the end of 180 days, if you don't pay the loan back entirely, there are longer loan lengths available with interest charges and fees.
Borrow Against Your 401(k)
If you have a 401(k) plan, you may be able to borrow (and pay back) your money to pay for home improvements. While not all plans are set up to allow this option, ImprovementCenter.com indicates "most 401(k) programs allow you to borrow up to $50,000 or half your vested balance, whichever is less." They state, "if your employer allows it, you can borrow money from your 401(k) for any reason, including a down payment for a house or to fund a home improvement project." Keep in mind, though, many financial experts advise against borrowing from your retirement plan for a variety of reasons.
Shopping for Home Improvement Financing
No matter which financing option you choose, you will want to shop around to make sure you get the best deal possible. Take time to compare lenders, interest rates, lending fees, and loan terms and conditions. The amount you pay in rates and fees can significantly impact the total cost of your loan and the home improvements you make.
