How to Pay for Home Improvements

How Much Do Home Improvements Cost?

The average cost of a home renovation is $14,192, according to HomeAdvisor, but what you ultimately pay could be much higher or lower. The size of the project and the cost of materials and labor will determine your total.

Minor repairs and updates also vary from one home project to the next. Before getting started, be sure to:

• Look for professionals who have good reviews; you can also ask family, friends and neighbors for recommendations.
• Compare quotes from several companies before making a decision.
• Estimate your costs for any DIY work you plan on doing.

From there, you can review your budget and start comparing the best ways to pay for home improvements.

5 Best Ways to Pay for Home Improvements

There are multiple ways to pay for home renovations—and each option has its own benefits and drawbacks. The right path forward for you will depend on your renovation costs and financial situation.

1. Cash

If you have sufficient funds in your savings account, you could draw on that money to cover home improvement costs.

Pros

• You won't accumulate new debt. Using cash reserves allows you to cover your expenses without borrowing money and incurring fees and interest.
• You may get a discount. Your contractor might charge less if you pay upfront with cash. (This can help them avoid credit card processing fees.)
• It's fast and easy. If you take out a loan or open a new credit card, it could take days before your money becomes available.

Cons

• You could deplete your savings. Tapping your savings could wipe out your cash reserves. Most experts suggest setting aside three to six months' worth of expenses for financial emergencies.
• You might not have enough cash. Some home improvement projects cost tens of thousands of dollars. Saving that much money could take longer than you're willing to wait to start the project.
• It could take away from other financial goals. Putting your savings toward home updates will leave less for other financial goals. That might include saving for retirement, starting a business or growing your family.

2. Personal Loan

A personal loan can provide funding for home improvement projects. After you receive the money, you'll repay it—with interest—over a predetermined amount of time.

Pros

• It provides upfront cash. This type of home improvement loan provides a lump sum of cash you can use to cover various home improvement expenses.
• You may have high borrowing limits. Some lenders allow qualifying borrowers to take out up to $100,000. That might be a good option for costly home projects.
• Your home isn't used as collateral. If you end up defaulting on a personal loan, your home won't be at risk like it would with other financing options, including home equity loans and lines of credit. Still, your credit score will take a major hit if you don't pay back your loan.

Cons

• Fees may apply. Some personal loans charge origination fees, prepayment fees, late payment fees and other penalties. That can all increase the cost of your loan.
• Interest rates can be high. Annual percentage rates (APRs) are typically higher when compared to home equity loans or lines of credit, especially if you have poor credit.
• Repayment terms can be short. Repayment terms generally range anywhere from a few months to seven years. Depending on how much you borrow, that could translate to a large monthly payment.

3. Credit Card

This is a line of credit you can draw on as needed. Whenever you add a charge, that amount is tacked onto your balance. You'll be charged interest if you carry a balance from one billing cycle to the next.

Pros

• It's accessible. If you already have a credit card, you could use it immediately to cover home improvement costs.
• You could earn rewards. Some credit cards allow you to earn rewards like cash back, airline miles and hotel points.
• It can help your credit. Using a credit card responsibly and making on-time payments can help improve your credit score.

Cons

• Interest can add up. If you're paying for a remodel or other large expense, it could take a long time to pay off your credit card balance. According to the latest numbers from the Federal Reserve, the average credit card APR is 22.75%.
• Your credit limit might not be high enough. Depending on your credit limit, you may not have enough room on one credit card to cover all your costs. Using multiple credit cards will leave you with more than one monthly payment.
• A big charge could hurt your credit. Even if you have a high credit limit, maxing out a credit card could drag down your credit scores. Your credit usage makes up 30% of your FICO^® Score^☉.

4. Home Equity Loan

Home equity is the amount of your home's value you actually own based on your home's value and outstanding mortgage balance. A home equity loan uses your home as collateral and allows you to borrow up to 75% to 85% of your equity. You'll then repay it with fixed monthly payments.

Pros

• It could unlock a lot of money. Depending on your equity, this type of financing could provide a large amount of cash to put toward home improvements.
• Interest rates are typically lower than other options. You'll likely pay less in interest when compared to credit cards, personal loans and home equity lines of credit. The interest rate is also fixed, making it easier to budget for payments.
• Interest may be tax-deductible. If you use a home equity loan to buy, build or substantially improve your home, the interest charges are tax-deductible.

Cons

• Closing costs come with the territory. You can expect to pay anywhere from 2% to 5% in closing costs. There may also be additional loan fees.
• You're reducing your home equity. That means it will take longer to pay off your mortgage. If home values drop significantly, you could find yourself owing more than your home is worth.
• Your home is at risk. You could lose your home if you're unable to repay your loan.

5. Home Equity Line of Credit (HELOC)

Like a home equity loan, a HELOC is secured by the equity in your home. But instead of receiving a lump sum of cash, you'll have access to a credit line you can borrow against during your HELOC's draw period. You can usually borrow anywhere from 60% to 85% of your home's assessed value (minus your remaining mortgage balance).

Pros

• You can borrow only what you need. You can use a HELOC as needed at any point during the draw period. This period typically lasts 10 years.
• Interest rates are competitive. Rates on HELOCs are usually lower than credit cards and personal loans.
• Your interest may be tax-deductible. Like a home equity loan, your interest is tax-deductible if you use a HELOC to buy, build or substantially improve your home.

Cons

• Interest rates are often variable. That means your rate could bounce up and down over time. A higher rate will increase your monthly payments.
• Fees may apply. Some HELOCs charge administration fees, origination fees, home appraisal fees and other penalties.
• Your home is collateral. You could lose your home if you fail to make good on your payments.

Should You Finance Home Improvements?

Financing home improvements can enable you to get the job done, but there are some important things to think about.

• What will your monthly payment be?
• What is the interest rate?
• Is the interest rate fixed or variable?
• How long is the repayment term?
• Are there any fees that could increase your costs?
• Can your budget absorb a new monthly payment?
• Will your home be at risk if you fall behind on your payments?

Also consider how new debt could impact your credit score. For example, using more than 30% of a credit card limit could work against you, but making on-time payments could actually improve your credit score. What matters most is demonstrating that you know how to use credit responsibly.

The Bottom Line

Home improvements can get pricey, especially if you're doing substantial work. One way to pay for home renovations is to finance some or all of your costs. If you take this route, make sure you can financially handle a new debt payment. Falling behind on your payments could hurt your credit—and potentially put your home at risk.

Making debt payments as promised is an important part of maintaining healthy credit. It can help improve your credit score and show future lenders that you're a creditworthy borrower. You can check your credit score and credit report for free with Experian.