If you’re hatching plans for home improvements, get ready for sticker shock: On average, a kitchen upgrade costs nearly $20,000, and a bathroom remodel can easily set you back more than $9,000, according to HomeAdvisor.com.
But a renovation that adds value to your property can be worth every penny. You’ll just need to figure out how to pay for it. Here are six ways to come up with the money.
1. Refinance your mortgage
If you financed your home a few years ago and your interest rate is higher than current market rates, a mortgage refinance could lower it — and your monthly payments. And that could free up cash for your dream renovation.
You might also consider a cash-out refinance to tap some of your home’s equity. Lenders will generally let you borrow enough to pay off your current mortgage and take out more cash, up to 80% your home’s value.
Think carefully before you embark on this type of refinance, though: You’ll be using your home as collateral for a bigger loan, and you’ll be financing short-term costs with long-term debt, which adds interest and other fees to the price of the renovations. In most cases, a cash-out refinance is only appropriate if you’re improving your home in ways that will increase its value.
2. Obtain a home equity line of credit
A HELOC is another way to borrow against the the value of your home, but unlike a refinance, it doesn’t pay off the original mortgage. Instead, you get a line of credit — usually up to 80% of your home’s value, minus the amount of your home loan.
HELOCs come with a draw period and repayment period. During the draw period, which often lasts about 10 years, you can spend the money in your credit line. Your monthly payments would cover mostly the interest and a little bit of the principal on any outstanding balance. During the repayment period, which typically lasts around 15 years, your monthly payments would probably be higher because they’d include more principal.
Interest paid on both HELOCs and home mortgages is generally tax deductible. But with HELOCs, the deduction is limited to $100,000.
3. Take out a second home loan
Sometimes called a home equity loan, a second home loan is another way to tap your equity without refinancing. Instead of getting a line of credit, as you would with a HELOC, you’d receive a lump sum of money. A second mortgage could make sense if you don’t want to refinance your first mortgage — if it has a very low interest rate, for example. But the interest rate would probably be higher with a second mortgage than with a refinance. Interest payments would be tax deductible.
4. Apply for a personal loan
Personal loans don’t offer the tax advantages of a refinance or HELOC, but they’re an alternative to using your home’s equity for financing and putting your home up as collateral. In fact, you may not have to put up any assets for collateral, but you’ll generally need good or excellent credit to qualify.
Interest rates are usually higher with personal loans than with home equity financing. There’s also a shorter timeframe to repay the money, about five to seven years. The shorter window could mean your monthly payments are larger than they’d be with other options, but you’d end up paying less interest overall.
If you have good credit but not much equity in your home, or you’d prefer a shorter repayment period, a personal loan could be a good choice.
5. Use a credit card
Plastic allows you to make purchases if you don’t have the cash up front, and certain credit cards give rewards for every dollar you spend. But you’ll want to make sure you can pay off your balance in full each month, because credit cards generally come with higher interest rates than other types of financing.
6. Save up and pay cash
It may require time and patience, but saving your money until you’re able to pay outright for a renovation eliminates finance charges. Paying with cash can also make it easier to stay within your budget.