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How to Finance a Home Renovation

MR - How to Finance a Home Renovation

When it comes to renovating a home, there are several different ways to go about getting the financing you need.

Before you decide on a finance option and begin the renovation, however, there are a few questions you will need to ask yourself:

  • What exactly do I want to update, and how much will it cost? 
  • Will I do the work myself or hire a contractor? 
  • How much money do I have on hand to cover the costs? 
  • How much money will I need to borrow? 
  • What is the way I want to borrow the money?

Once you answer these questions, you can start looking at the different finance options and figure out which is the best option for your project.

What is a home renovation loan?

In general, a home renovation loan is based on the value of a house after the renovation. The calculated price of what the house will be worth after the home improvement project is completed will determine how much the homeowner will be able to borrow. 

There is a notable difference between a renovation loan and a rebranded personal loan advertised as a home improvement loan. It’s important for homeowners not to get confused, as the latter is not suitable for home improvements, especially bigger projects. This is because rebranded personal loans often have time limits, higher interest rates, and limited loan sizes that normally do not cover the renovation project. 

Renovation loans are the only ones of their kind because they are the only ones that will give enough money to cover what the future value of the home will be. 

How you choose to finance your home renovation project is solely up to you and your circumstances. The most popular home renovation finance options are:


Cash is the easiest option, as all you must do is make sure you have enough funds readily available to cover all the costs. This is also easy because you don’t have to worry about figuring out what the interest rate will be. However, unless you are simply making a few minor upgrades to a space, you more than likely will not have all the funds needed to cover the costs available in cash.

Home equity line of credit

You have the option to borrow money on the ownership or equity of your house. This will create a second lien on your home. Generally, you will be able to borrow up to 85% of what your house is worth. You will then have your mortgage if it is not already paid for, and this loan is an addition to that. Most home equity lines of credit loans have two phases. Phase one is the draw phase, where you will have access to the borrowed funds, and you will only have to make interest rate payments. 

Phase two is the repayment phase, where you will not be able to borrow any additional funds. You will have to make payments that include the interest rates until the loan is paid off. The interest rates for these types of loans depend on the market and will fluctuate because of that. This type of loan is recommended for smaller projects versus large ones. 

Cash-out refinance

This finance method for home renovation projects will give you a new mortgage. A set amount of the home upgrade will be given and then added to create a new mortgage for your home. Although this choice will create a higher mortgage, it will have a set interest rate. These interest rates are typically lower than the ones that are associated with a home equity line of credit. However, this method often ends up costing more with higher monthly payments and higher closing costs than the line of credit option. 

Loans from other sources

Many people choose to get a loan from a source that may not have originally had the purpose of home improvements. For example, some choose to withdraw money from their 401k or IRA funds. This doesn’t come without implications, though, as there are often penalties that occur, and you will not have as much money left in your savings for your retirement if you take the money for home renovation projects.

Renovation financing

Another option that homeowners have is called renovation financing. This can be a good option, especially if you have little equity because the loan will be based on what the house will be worth after the renovation is complete instead of what the house is currently worth. The loan is added to your current mortgage, and the lender will pay the contractor as the work is being completed. With this type of financing, it’s important for the homeowner to make sure the renovation will increase the value of the home before going through with it.

Point-of-sale financing

Aside from paying cash in full, point-of-sale financing is the easiest finance option for home improvement projects. Homeowners will work with a lender with whom their contractor has a long-standing working relationship. This makes the process much easier as the homeowner is not only working with a trustworthy lender, but they are also working with a loan agreement that both the contractor and lender are familiar with. 

The experience that the two have can help them with coming up with the best, stress-free option and procedure for the homeowner. This loan is also one of the quickest options, as most homeowners are approved almost immediately. These payments for this type of financing are generally lower than other options. However, the homeowner will need to make sure they choose a contractor who has a good standing with lenders if they are planning on financing their home renovation with point-of-sale financing.

Best home renovations to make

Increasing the value of your home is the primary goal of home renovations, aside from making it look nicer or better serve a particular function. As a homeowner, you don’t want to go through the work of making plans, finding a contractor, purchasing materials, and getting a renovation financing loan before you make sure that what you’re renovating is actually going to make you money. 

Here are some of the most profitable home renovations a homeowner can make.

Kitchen upgrades

Although you may want to do a full remodel or demolition on your kitchen to get it looking like the most recent popular styles, that may not be as profitable after the hefty price you will pay for all the materials and work. Instead, it can be more lucrative to make a few important upgrades within your kitchen. Some of the most popular upgrades are new floors, refurbished cabinetry, and new appliances. These minor upgrades can increase the value of your home and cost far less than a full remodel.

New windows

New windows are an easy upgrade that homeowners can make to their house. Vinyl windows are a popular option that can add a modernized look to your home. They can also lower utility costs as they are extremely energy efficient. Window replacements will depend on the size of the home, so the overall price of this renovation will vary greatly.

Garage door

A very easy and affordable renovation that homeowners can make is to replace their garage door. A garage door can be a huge eyesore if it’s outdated. Replacing a garage door with a modern one can give your home’s exterior a great upgrade.

New siding

The exterior of the home is the first thing people see, and if you want to get people looking at your house, then you want the outside to be appealing. Having new siding installed can do just that, and this renovation is very likely to make you a profit.

New entry doors

Just as the siding and garage door of your home are both elements that passersby or potential buyers first see, so is the front door. Replacing your front door with one that is modern and stylish can help boost your home’s curb appeal

Wood decking and outdoor entertaining space

Outdoor entertaining has become increasingly more popular over the years. If your home doesn’t have an outdoor space or if the space is outdated, you may want to consider adding a wood deck or patio to your house. These spaces for entertaining can be as large as you want, but you will want to be sure they are functional, as their purpose will be for gathering and guest events. Prices will vary greatly depending on size and material, but any option you choose is likely to have a positive effect on your home’s value. 

As you work through your plans for renovating your house, be sure the upgrades you make will increase the value of your home so that you can make a profit in the long run. Also, be sure to do all your research before signing anything to ensure you are working with a trustworthy lender and that you are also choosing the best option for yourself. Contact us today to discuss your renovation plans.