How to Fund Renovations

From mortgage refinancing to government loan programs, home owners have a variety of financing choices.

Model house made with $20 bills.

Unless their house is brand new, most homeowners have a detailed wish list of areas they'd love to renovate. Much of the pleasure in owning a home is the opportunity to continually refine and improve your property.

For many people, there's one thing that prevents the realization of that renovation wishlist - lack of money. Home remodeling isn't cheap, but it's often a good investment if you can come up with the funding to get the work finished.

Fortunately, today's homeowners have a plethora of options for funding renovations. 

Cash

Cash, as always, is king. You don't have to worry about the time and effort it takes to secure a loan, you maintain financial flexibility, and you avoid debt and associated interest costs.

Unfortunately, not everyone has the means to pay out of pocket. But if you can use cash for improvements while meeting your other spending and savings goals, it's a great option.

Mortgage Refinancing

Refinancing your mortgage at a lower interest rate can free up cash for renovations. If your mortgage interest rate is higher than current rates, use an online calculator to estimate potential monthly savings.

There is one caveat: Don't extend your debt well beyond the useful life of your renovations. Nobody wants to foot the bill for a second round of renovations while still paying off your first round from 10 or 15 years earlier. You may want to act quickly, however, as interest rates have begun to rise after years of hovering near historic lows.

Tapping Home Equity

For those who don't benefit from refinancing, a home equity line of credit or loan is a smart choice. A home equity line of credit functions like a credit card and provides you with a set limit to which you can borrow. No interest is charged on the unused portion of your line of credit. You can withdraw funds as needed, which makes this a good option for those with ongoing projects. A home equity loan offers tax benefits similar to a mortgage, but without closing costs. The full value is paid upfront.

FHA 203k Loan

An FHA 203k Loan is a useful federal program that allows you to refinance your existing mortgage while rolling improvement costs into a new mortgage. One drawback: You'll have to carry mortgage insurance for the duration of the loan, which can be a significant added expense.

Reverse Mortgage

Reverse mortgages sometimes get criticized for their relatively high cost (at least compared to refinancing or a home equity loan), but they do have one advantage: you don't have to repay the money until you move or sell the home. One catch: You have to be at least 62.

FHA Title One Loans

If you're seeking $25,000 or less in funding and don't have equity in your home, the FHA Title One loan is a sound option. These loans are insured by the government and offer competitive rates.

The Takeaway

Undertaking major renovations is a serious financial commitment, so it's imperative that you rigorously explore your options. By securing the most favorable funding possible, you'll be in a stronger financial position - and in possession of a beautifully remodeled home.