From minor changes like a fresh coat of paint to major ones like room additions, home improvement projects can make your home a better place to live and boost its value. The cost of a home improvement project can add up fast, but there are several options for financing home improvements big and small. Learn which one best fits your needs.
What's the Best Way to Pay for Home Improvements?
You can pay for home improvements in several ways:
Personal Loan
A personal loan is an unsecured installment loan. You receive a lump sum and immediately begin paying it back with interest in regular monthly payments.
| Personal Loan Pros | Personal Loan Cons |
|---|---|
| Personal loans can have looser credit requirements than home equity loans and HELOCs. | Personal loans usually charge a percentage of the loan amount as an origination fee; there may also be late fees or fees for paying the loan off early. |
| You don't need equity in your home to get the loan. | Personal loans generally have higher interest rates than home equity loans or HELOCs. |
| You can use a personal loan for any purpose, not just home improvements. | Repayment terms are fairly short—typically one to seven years—which can make it hard to pay off a large loan. |
| Your home isn't used as collateral, so it's not at risk if you don't repay the loan. | Interest paid on personal loans isn't tax-deductible. |
Credit Card
If you're financing a relatively small home improvement project, you could use a credit card to pay.
| Credit Card Pros | Credit Card Cons |
|---|---|
| Credit cards are readily accessible if you have good to excellent credit. | You may not qualify for a credit limit high enough to completely finance your project. |
| Depending on the card, you may earn rewards for credit card spending. | A big charge could increase your credit utilization ratio and hurt your credit score. |
| If you can't pay the balance in full during the same billing period, you'll incur interest. | |
| Credit card interest rates can be much higher than other options. |
To avoid having to pay for your entire home improvement project when your next credit card statement arrives, apply for a card with an introductory 0% annual percentage rate (APR). During the intro period of a 0% intro APR credit card, you can carry a balance without incurring interest; if you pay the balance in full before the introductory period ends, you'll pay no interest at all.
Using a rewards credit card to earn points, travel rewards or cash back on home improvement spending can work for projects done in stages, so you can pay off the balance each month. Otherwise, interest costs could outweigh any rewards. Look for a card offering bonus rewards for new cardholders to boost rewards even further.
Both 0% intro APR cards and rewards cards generally require good to excellent credit.
Cash
Depending on the cost of your home improvement project, you might be able to pay for it in cold, hard cash.
| Cash Pros | Cash Cons |
|---|---|
| No payments to make | Draining your savings or emergency fund for home improvements could leave you without resources in a financial emergency. |
| No fees or interest charges | Saving enough for a large home improvement project may not be possible in the time frame you want to complete the improvements. |
| Many contractors offer discounts for paying in cash, potentially reducing the cost of your project. |
Home Equity Line of Credit (HELOC)
If you have good to excellent credit, you may qualify for a home equity line of credit (HELOC), a form of revolving credit secured by the equity in your home. You can usually borrow 60% to 85% of your home's assessed value, minus the remaining balance of your mortgage.
Most HELOCs allow you to draw on your credit for a "draw period" of up to 10 years. During this time, you'll make interest-only payments on any money borrowed. (Some lenders accept principal payments during the draw period.) After the draw period, you typically have 20 years to pay off the loan balance, or you can refinance the loan.
| HELOC Pros | HELOC Cons |
|---|---|
| Instead of getting a lump sum that you must start repaying immediately, you can borrow only what you need. | Most HELOC interest rates are variable and could rise, increasing your payments. |
| A HELOC can be used for any purpose, not just home improvements. | HELOCs may involve origination fees, administration fees, home appraisal fees and late payment fees. Make sure you understand all fees involved. |
| Since HELOCs are secured by home equity, interest rates are generally lower than for personal loans or credit cards. | You might end up owing more than your home is worth if your home's value declines. |
| Interest paid on a HELOC may be tax-deductible. | If you can't repay the loan, you could lose your home. |
Another downside of a HELOC is that once the draw period ends, your payments will dramatically increase. Unless you've planned for this (or your lender lets you pay down principal during the draw period), you could have trouble repaying the loan.
Home Equity Loan
A home equity loan is a second mortgage that uses your home's equity as collateral. You can generally borrow 75% to 85% of your equity at a fixed interest rate and pay it back in fixed monthly payments over five to 30 years.
| Home Equity Loan Pros | Home Equity Loan Cons |
|---|---|
| Depending on your equity, you may have access to a large sum. | You'll typically pay closing costs of 2% to 5% of the amount borrowed; there may also be fees for home appraisal, late payments or loan prepayment. |
| Interest rates are usually lower than those for HELOCs, credit cards or personal loans. | Because you'll reduce your equity, it will take longer to pay off your mortgage—and if home values drop substantially, you could owe more than your home is worth. |
| Interest rates are fixed, making it easier to budget for payments. | If you can't repay the loan, you could lose your home. |
| Interest paid on a home equity loan may be tax-deductible. | |
| A long repayment period can make it easier to pay back a large loan. |
You'll need good to excellent credit to qualify for a home equity loan, but if you have a large project and sufficient equity, this could be an option. You might also consider a cash-out refinance if you've built significant equity in your home.
What to Consider Before Doing Home Improvements
Before taking on debt to finance home improvements, assess whether you could save enough cash to cover the project by revising your budget. You might also be able to save by doing some home improvements yourself. Keep in mind that putting all your money into redoing your home can leave you house-proud but cash poor, which could have negative long-term consequences on your credit and personal finances.
If you do decide to apply for a loan, HELOC or credit card to cover home improvements, check your credit report and credit score to see where you stand, and to better understand what type of credit you're likely to qualify for.