Published in: Banks | May 5, 2019

Financing a Home Remodel: What's the Best Approach?

What's the best way to pay for upgrades to your home? Check out this guide to pick the best option for you. 
Worker performing home repairs. Image source: Getty Images.

Upgrades to your house can make your home a more enjoyable space to be and can help to accommodate a growing family or changing needs. But home remodels come at a big cost. The average cost of a kitchen remodel in 2019 is just over $22,000, while adding a two-car garage to your home could come with a price tag of more than $27,000.

A remodel or home improvement can be worthwhile if it makes your home more liveable and increases its resale value, but you need to be able to fund these costs up front. And, for many homeowners, that's easier said than done. To help you decide the best approach to financing a home remodel, consider a few popular funding options described below.

Paying in cash

If you can save up for a home remodel and pay in cash, this is the ideal solution. You'll get the benefit of increasing your home's value without having to pay interest on a loan. And since many home improvements provide less than a 100% return on investment, you won't be borrowing money for something that doesn't pay you back.

Of course, while paying in cash for upgrades is a great option when you can pull it off, it isn't an option for a great many homeowners. Saving up thousands of dollars to remodel your home could take many years, and if you have pressing projects that need to be done now, you'll need to consider alternative sources of financing.

Home equity loans or lines of credit

Another option available to some homeowners is to use the equity in your home to pay for upgrades. You can access the equity in your house using a home equity loan or line of credit. The catch is that you need enough equity to qualify. You can't typically take out a home equity loan if doing so would bring the total balance of your mortgage loans up to 100% of what your home is worth. In fact, most home equity loan lenders won't let you borrow more than 90% of your home's value across all mortgage loans.

There are a few huge advantages of a home equity loan or line of credit if you can qualify for one. You may be able to deduct the interest you pay on your taxes, provided you itemize your deductions and you use the home equity loan to improve the house that's serving as collateral for the loan. Further, the interest rate on a home equity line or line of credit is usually lower than the interest rate on any other type of loan you'll take out, because the debt is secured by your home.

There are downsides too, however, and they may outweigh the benefits for many homeowners.  The biggest downside is the risk that comes with taking equity out of your home. When you do this, there's a chance you could end up owing more than your property is worth -- even with the upgrades, as remodeling almost never provides a 100% return on investment.

If your house is worth less than what you owe, you'll have trouble when it's time to sell, because you'd have to come up with extra cash to pay off the bank in full. If you can't do this, you won't be able to leave your home without ruining your credit.

If you become unable to pay back your loan, you could also get foreclosed on. And unless you itemize on your taxes, you won't get to deduct interest paid, so the biggest benefit you'd be left with is that your home equity loan would probably have a lower rate than other forms of financing.

Personal loans

For many homeowners, personal loans are the ideal solution for financing a home remodel. A personal loan can be obtained from a wide variety of sources. Online lenders, credit unions, peer-to-peer lenders, and banks all make personal loans available to qualified borrowers. These loans often have reasonable interest rates as well. While their rates won't be as low as those of home equity loans, they should be well below the standard APR on credit cards.

Personal loans can provide you with a substantial sum of money for remodeling if necessary. Some lenders allow you to borrow as much as $100,000 if you can qualify based on credit and income. Different lenders have different repayment periods, so you can find a loan with a payoff timeline that works for you. And most personal loans aren't secured by collateral, so you don't put your home or other assets at risk.

Because there are lots of lenders offering personal loans, it's important to shop around for the best interest rate and the loan terms that fit your needs. You should get several different quotes and compare your loan offer to other sources of home remodel financing. If you can find a personal loan at a reasonable rate and borrow the amount you need, this may be your best bet when paying cash isn't possible.

Credit cards

Credit cards aren't an ideal way to finance a home remodel. The standard interest rate on a credit card is usually very high, so your home upgrades could become much more expensive. While many card issuers offer a 0% promotional rate for a limited time -- so you may pay no interest for up to 12 months or so -- many remodels are too expensive to pay off in that time frame, so you'd likely be left with a lot of debt remaining when the rate jumps up.

You may also not be able to borrow all you need with a credit card, as many creditors offer much lower limits than the typical amount you'd need to spend on a remodel. And unlike personal loans with a fixed timeline for paying what you owe, credit cards only require you to make minimum payments, so it could take decades to become debt-free unless you're willing and able to pay more than is required.

Which approach is right for you?

Paying for a home remodel with a personal loan is often the best choice if you can't claim a tax break for home equity loan debt and you don't want to jeopardize your house. If you're confident you can pay back the loan, you itemize on your tax return so you can deduct interest, and you aren't worried about potentially owing more than your house is worth, then it may make sense to consider a home equity loan. Just be sure whatever loan you choose is affordable and covers the costs of the remodel you need to complete.

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