65% of Younger Home Buyers Plan to Renovate in 2021. Here's How to Do So Affordably

Here's how to pull off home renovations when you can't pay for them outright.

The coronavirus pandemic caused a lot of people to spend more time at home. And that has inspired many homeowners to make renovations. In fact, 65% of younger homeowners say they're likely to renovate this year, according to Bank of America's 2021 Homebuyer Insights Report. If you're in that boat, you may be wondering how to do so affordably. Here are some options.

1. Borrow against your home

Because home values have risen on a national level, a lot of property owners today have plenty of home equity to tap. Equity refers to the portion of your home you own outright. If your home's market value is $400,000 and you only owe $300,000 on your mortgage, you're left with $100,000 in equity. And you can borrow against that amount with a home equity loan or a home equity line of credit (HELOC).

With a home equity loan, you borrow a lump sum and pay it off over time. With a HELOC, you get access to a line of credit you can draw from as needed.

The upside of a home equity loan is that your monthly payments will be predictable because the interest rate on that loan will generally be fixed. HELOC interest rates are often variable, so your monthly payments can shift over time. But HELOCs give you more flexibility. You can apply for a larger line of credit than you think you need and tap it when unplanned expenses arise.

2. Take out a renovation loan

If you don't want to borrow against your home, you can take out a renovation loan instead. A renovation loan is an unsecured personal loan you take out for home improvements.

Unlike a home equity loan or HELOC, your home won't be used as collateral for that loan. But you'll need a high credit score to qualify for a great rate. And you might pay a higher interest rate on a renovation loan than a home equity loan or HELOC. But if you fall behind on your loan payments, you won't run the same risk of losing your home.

3. Do a cash-out refinance

When you do a cash-out refinance, you borrow more than your existing mortgage balance and get the remainder in cash. You can then use that money for renovations.

Going back to our example, if you owe $300,000 on your mortgage but want to do a $30,000 renovation, you could refinance your mortgage into a new $330,000 loan. The first $300,000 would pay off your original mortgage lender, and you'd get the rest in cash.

The upside of a cash-out refinance is that you'll generally snag a lower interest rate on the sum you borrow than you would with any of the other loan types. This especially holds true today, with refinance rates being so low. But be careful, because the more money you borrow in mortgage form, the more you'll need to pay back. If you take too much cash out of your home, your monthly mortgage payments could climb higher than you can reasonably afford.

Renovating a home can make it more comfortable, and it can also increase its value. Be sure to explore your options for financing renovations before diving in so you land on the most affordable choice.