Editorial Policy

5 ways to finance a big home improvement project

Allie Johnson

December 14, 2015

You desperately want to replace your roof, rip out that stained laminate countertop or install energy-efficient windows, but you lack the cash. Don't worry: There are many financing options, including putting the project on your credit cards.

Before you go into debt, though, consider whether you truly need to do the project right away, says Linda Sherry, director of national priorities for consumer advocacy group Consumer Action. “Ask, ‘Is this a need or a want?'” she says.

If you can, it's always best to plan ahead and save up so you can pay with cash. “Financing home improvements will always add to your financial burden,” she says.

But if borrowing is in your budget — meaning you can afford monthly payments — it's important to know exactly how much the project is going to cost before you decide which financing choice is best, Sherry says. To do that, take these three steps:

  • Shop around for qualified contractors, if the job requires one, talking to family and friends and checking for online recommendations or complaints. Then, get multiple bids in writing, Sherry says. Ask any contractor you're considering if you can speak to a former customer or two. “Any reputable contractor will agree,” she says.
  • Once you've chosen a bid and arrived at a total cost, tack on 20 percent for cost overruns, Sherry says. Projects almost always set you back more than you plan — whether it's because you decide to upgrade to pricey granite and stainless-steel appliances, or because the contractor uncovers hidden issues in your home.
  • Once you know how much your project will cost, then shop around for the financing deal that works best for you.

When you're ready to move forward, here are five ways to finance a home improvement project, along with the pros and cons of each:

1. Credit card — A credit card can be a quick, easy way to pay for a small- or medium-size project that costs up to a few thousand dollars, such as new carpeting or flooring, Sherry says.

Financing home improvements will always add to your financial burden.”
— Linda Sherry,
director of national priorities
for consumer advocacy group Consumer Action

If you've got good or excellent credit, you can look for a deal with a 0 percent interest introductory period. You can find those offers through big box home retailers, as well as major credit card issuers. Before you apply, read the terms carefully and make sure that you'll be able to make all payments on time and pay off the entire balance in full within the 0 percent period. Otherwise, you can get hit with interest on the entire amount. “A lot of people run into that issue,” she says.

Another possibility is to look at the credit cards in your wallet to see if you have a big bank card with a fairly low interest rate and enough available balance. It might be better to pay low interest than to risk getting hit with high interest if you don't pay off the balance in a set time frame, she says.

Tip: If you use a 0 percent credit card deal to pay for your project, plan to pay extra each month so you can get to a zero balance two to three months early, says Denise Winston, a financial expert and the author of “It's Your Money – Avoid Costly Mistakes.” That way, you have plenty of time to make sure you're squared away. She adds: “You don't want a nasty financial surprise.”

2. A home equity loan or line of credit — A home equity loan and a home equity line of credit both allow you to borrow against a portion of the equity you have in your home. With a home equity loan, you borrow a specific amount and then pay it back in equal payments each month for a set time period, Winston says. With a home equity line of credit (HELOC), you can draw on the money when you need it, and your payment varies based on how much you owe, she says.

Both home equity loans and lines of credit can be a good option for costly home improvements because they tend to carry low interest, Winston says, and the interest costs are typically tax deductible.

However, there are downsides: You have to jump through several hoops, including an appraisal of your home value and a closing. “There is a big hassle factor,” Winston says. You may have to pay closing costs and other fees. And, if you end up unable to pay, you could lose your home.

Tip: A home equity line of credit allows you to pay down your balance, then turn around and spend it back up again, so consumers who would find that too tempting should consider going with a home equity loan instead, Winston says. “You get a lot of flexibility, but that flexibility can be dangerous,” she says of HELOCs.

Always know what you're getting into before you sign on the dotted line.”
— Denise Winston,
a financial expert and the author
of “It's Your Money – Avoid Costly Mistakes”

3. A cash-out refinance — A cash-out refinance also can be a good way to pay for a large home improvement project costing $20,000 or more, such as a kitchen remodel or new windows, Sherry says. It involves refinancing your home and rolling the loan amount into your new total balance. You get that cash to pay for your home project and pay it back as part of your mortgage.

As with the home equity loan and HELOC, though, you spend a lot of time and effort on a refinance, including getting an appraisal and signing reams of documents at closing, Sherry says. Not to mention that you will be paying interest for the life of the loan for your project.

Tip: Look at your own budget and know what you can afford before you set foot in a bank, Winston says. It should be you, rather than the bank, who decides what fits in your budget, she says.

4. A personal loan — An unsecured personal loan will have a higher interest rate than a home equity loan or line of credit. Winston also adds that it can be hard to get a personal loan for a big home project.

However, consumers with excellent credit might be able to get a peer-to-peer loan, Sherry says. Companies such as Prosper or Lending Club offer unsecured personal loans with funds put up by other consumers, but rates vary widely based on creditworthiness. And borrowers should not assume these lenders will be any more lenient than banks, Sherry says. “They're not kinder, gentler lenders,” she says.

Tip: If you want a personal loan with a lower interest rate, some banks or credit unions may allow you to put up your paid-off car as collateral, lending you up to 80 percent of its appraised value, Winston says.

5. Big box store financing — Some big box home improvement stores also offer sizeable loans. For example, the Home Depot Project Loan allows consumers to borrow up to $40,000 at a fixed 7.99 percent interest rate over seven years. However, if you borrowed the maximum amount and took the full seven years to pay it off, you'd fork over more than $600 a month and more than $12,000 in interest alone.

In most cases, it would be better to get a home equity loan or line of credit, or do a cash-out refinance, than to go with a big box loan for an expensive project, Sherry says. With those options, you might get more time to pay off the loan and a lower interest rate.

Tip: Tempted to go for a big box store loan anyway? Make sure you read the terms and conditions carefully. “Always know what you're getting into before you sign on the dotted line,” Winston says.

Whatever the home project, you have financing options. Just do your homework, as some financing methods are better for smaller or larger projects. And before you plan your project and how you might pay for it, remember what Sherry suggests: Ask yourself, “Is this a need or a want?”

SEE ALSO: 7 traits smart borrowers possess, Pros and cons of home improvement credit cards

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