Achieve Your Home Remodeling Dreams: The 6 Best Ways to Finance Renovations

Home renovations continue to be a significant trend, driven by the desire for comfort and increased home value. With the current housing market and limited inventory, homeowners are opting to renovate rather than move.

Whether you’re looking to adapt to your evolving lifestyle or simply improve your home’s style or livability, now might be the right time to invest in your current home. If you’ve been dreaming of a home remodeling project, here are a few benefits and various options based on your unique situation and goals:

The Current State of Home Renovation Projects

Remodeling remains very popular, with larger scope projects such as additions and kitchens seeing a significant increase. This surge is due to the limited housing stock and homeowners' reluctance to give up their low mortgage rates. Instead, they are choosing to expand their current homes for a less expensive investment.

Typical Costs of Home Renovations

The cost of home renovations varies widely depending on the project's scope and nature. Here are some typical cost ranges for common projects according to JH Universal Construction LLC, Paradise Builders and Haven Creek Homes:

• Kitchens: $60,000 - $100,000 
• Hall Bathrooms: $30,000 - $60,000 
• Primary Bathrooms: $45,000 - $90,000 
• Lower-Level Renovations: $60,000 - $180,000 
• Additions: $50,000 - $250,000 

How to Pay for Home Renovations

Selecting the appropriate financing option depends on your budget and how quickly you want to pay off the loan. For shorter-term needs, a Home Equity Line of Credit (HELOC) might be suitable, while longer-term projects may benefit from a fixed-rate loan to avoid payment variations. Once you understand your project goals, it’s important to discuss these options with your advisor to determine which is right for you:

Home Equity Loan

What is it? 

A home equity loan is secured against the equity in your home. Tapping into your home’s equity can be an effective way to fund home improvement projects. Paid out in a lump sum, a borrower repays the loan through a fixed monthly payment at a fixed interest rate.

Considerations

• • Consider a home equity loan if you need a large sum of money upfront to pay for a home improvement project. 
  • Suitable for specific projects with estimated costs, such as kitchen renovations. 

Benefits 

• • Predictable payments due to fixed interest rates. 
  • Enables borrowers to rebuild home equity as loan payments are made. 
  • Potential tax benefits depending on the type of improvement. 

Home Equity Line of Credit (HELOC)

What is it?

A Home Equity Line of Credit is also secured by the equity in your home. Similar to a credit card, it allows you to borrow from a line of credit – just as much as you need, when you need it. The interest rate is variable, meaning interest can fluctuate from month to month, and is charged only on what you borrow.

Considerations

• • Suitable for projects spanning a significant amount of time with uncertain total costs.
  • Offers flexibility for DIY projects or those working with contractors. 
  • Less predictability for monthly budgeting due to variable interest rates. 

Benefits

• • Replenishes available credit and home equity as the balance is paid down. 
  • Lower initial payments during the draw period, as only interest is required. 

Renovation Loan

What is it?

A renovation loan factors the future value of the home into the loan amount. It may be appropriate for large remodeling projects, like a bathroom remodel or transforming a home into an open concept living space.

Considerations

• • Requires working with a contractor to qualify. 
  • The project must add value beyond the cost of improvements. 
  •  Often used by borrowers purchasing a "fixer upper."

Benefits

• • Enables borrowing based on the projected value of home updates. 
  • Opportunity to build more equity in the home. 

Cash Out Refinance

What is it?

Using the equity you’ve built in your home, cash-out refinancing replaces your current mortgage with a single loan for all of your borrowing needs. It is essentially a loan that is higher than the current amount you owe on your mortgage, with the difference being paid out to you in cash.

Considerations

• • Requires a certain percentage of home equity to qualify. 
  • Results in a new monthly payment and interest rate.

Benefits 

• • May offer a lower interest rate than the original mortgage. 
  • Can be used to build more equity in the home. 

Personal Loan

What is it?

There are two main types of personal loans – secured and unsecured. A secured loan enables you to use collateral besides your home to finance, such as a car, boat or an RV. An unsecured personal loan is not secured by any item of value, such as a credit card or student loan.

Considerations

• • Suitable for short-term, smaller financing needs. 
  • Generally has higher interest rates than home equity financing options. 

Benefits

• • A viable alternative for those without substantial home equity. 
  • Can have a quicker payback period, helpful for debt consolidation. 

Securities Backed Line of Credit (SBLOC)

What is it?

A SBLOC is a type of revolving line of credit where you borrow money against the value of your securities (like stocks, bonds and mutual funds) in your brokerage account. It allows you to access cash without having to sell your investments.

Considerations

• • Suitable for short-term credit needs for current or ongoing projects. 
  • Offers flexibility to draw funds as needed. 

Benefits 

• • Allows for a lower interest rate. 
  • Can be used to pay for itself during repayment. 
  • An alternative to liquidating retirement funds, avoiding income tax penalties. 

By understanding the typical costs associated with different types of renovations and selecting the right financing option, homeowners can achieve their remodeling dreams and increase the value of their property. Connect with an advisor to determine the most suitable financing option and create a realistic budget for the project today.

ABOUT THE AUTHOR

Josh Kotter

AVP Senior Mortgage Loan Officer | Johnson Financial Group

As Assistant Vice President, Senior Mortgage Loan Officer, Josh guides individuals through the entire homebuying journey. Using his decades of mortgage experience, Josh works hard to find the best financial solutions and mortgage program to meet each client’s needs. With a strong focus on helping first-time homebuyers, Josh is passionate about empowering clients to achieve their dream of homeownership.