How to pay for home improvements

In a nutshell

Americans spent $463 billion in 2023 on home improvements and repairs. Fixing up your home can boost its resale value, lower energy costs and improve its comfort and functionality. While home improvement projects often come with a hefty price tag, there are several ways to pay for them.

Depending on your credit, you may qualify for financing that can cover the cost of home improvement projects.
Cash-out refinancing, home equity loans and home equity lines of credit (HELOCs) allow you to leverage your home equity to pay for home improvements.
Credit cards with low introductory APR offers provide a path to financing without expensive interest charges for a limited time.

Many ways to finance home improvements

There are multiple ways to fund home improvements. The method you choose will depend on your financial resources and home improvement goals.

Cash

It's hard to go wrong funding home improvement projects with cash. There's no debt, no interest charges and no collateral required. For do-it-yourself projects, you control when you need the money. If you're using a contractor, you might be able to break up payments over time. Setting aside money each month for your project can help you avoid dipping into your monthly budget.

Pros:

No interest charges to add to the total overall cost.
No loan applications or credit checks.
Lower risk than options that use your home as collateral.
No borrowing limits.

Cons:

Your project budget is limited to your available funds.
You may need to delay projects until you have enough money saved.
You may need a considerable amount of money saved to cover larger projects.

Personal loans

Personal loans are unsecured loans that can help finance home improvements and other needs. These loans don’t require collateral. Instead, your income and credit profile determine your eligibility. Personal loan interest rates vary depending on your credit score, income and other lender requirements.

Securing a personal loan is typically quicker than home equity financing. Generally, you can receive loan funds within a week, but in some cases, lenders may fund a loan on the same day as approval. Personal loans are available as low as $1,000 and up to $100,000 or more.

No collateral required.
Personal loans come with fixed rates and predictable monthly payments.
Lenders generally process personal loan applications quickly.
You can use loan funds for any type of home renovation.

Usually requires good to excellent credit to qualify for a loan.
Typically higher interest rates than some other financing options such as home equity loans.
Lower maximum loan amounts than some secured loans.

Home equity loans

A home equity loan is a type of fixed-rate loan in which the borrower taps into the equity of their home as collateral. Depending on the lender, you may be allowed to borrow up to 80% to 85% of your home's equity.

You’ll receive a home equity loan as a lump sum and pay it back over five to 30 years. These loans have no closing costs and, typically, no application or origination fees.

Lower interest rates than some financing options.
Possible tax benefits for mortgage interest paid if you use the money for home renovations (but not for other purposes).
Higher borrowing amounts than other loans.
Predictable fixed monthly payments.

Uses your home as collateral, which could lead to foreclosure if you default on your loan.

Home equity lines of credit

A home equity line of credit (HELOC) taps your home's equity but works more like a credit card. It allows you to borrow as needed up to a set limit and pay interest only on the amount you use. HELOCs are a great option if you're unsure exactly how much home improvement projects will cost. Plus, they offer flexibility to use funds, pay them back and reuse them again.

HELOCs usually come with a variable interest rate, but some lenders may offer ways to lock in a fixed rate for all or a portion of your credit line. Generally, HELOCs feature a draw period in which you can withdraw funds up to the credit limit, followed by a repayment period.

Flexibility to borrow as needed for home improvement projects — and to pay interest only on what you use.
Mortgage interest payments may be tax-deductible if you use the money for home renovations (but not for other purposes).
Reuse your credit line as you pay it back.

Has variable rates, making payments unpredictable and, potentially, unaffordable if rates rise.
You could risk losing your home if you can't make payments.

Credit cards

Credit cards typically have high interest rates, making them more useful for smaller projects with less financial commitment.

Paying for larger projects on a credit card is generally a bad idea unless you can pay the balance off right away, and some contractors and home improvement companies don't accept credit cards as a form of payment (or may charge a hefty processing fee). Check with your contractor for a list of acceptable payment options.

To avoid costly interest charges, have funds available to pay your full card balance on time. Another option is a 0% APR credit card, which offers an extended interest-free period, usually between 12 and 18 months or longer.

Some cards offer extended periods with no interest on purchases.
Quick access to money to cover project expenses.
No collateral required.
Build your credit if you use cards responsibly.

Higher interest rates than other financing options.
Interest charges on your balance if you don't pay it in full.
Interest rates may jump considerably after an interest-free introductory period ends.

FHA Title 1 Loans

The federal government also offers home improvement financing solutions. The FHA Title 1 loan program, managed by the U.S. Department of Housing and Urban Development, offers a specialized option for homeowners looking to make improvements, particularly if they have limited equity or less-than-perfect credit.

The Title 1 loan program allows borrowers access up to $25,000 for single-family home improvements with a repayment term of up to 20 years. For loans over $7,500, your home will be used as collateral. First-time homebuyers need to have lived in their home for at least 90 days before they're eligible for a Title 1 loan.

What sets the FHA Title 1 loan apart is its accessibility to homeowners who might not qualify for traditional financing options like home equity loans or HELOCs because of a low credit score. This option can be especially useful for first-time homeowners who are starting with little equity but face immediate repair or renovation needs.

To apply, borrowers will go through a process similar to that of securing a mortgage, which includes a credit check and income verification. Not all lenders offer Title One Loans. The U.S. Department of Housing and Urban Development website provides a searchable list of approved lenders.

Helpful if you have less-than-perfect credit.
Doesn’t require a significant amount of home equity.
Lower interest rates than some private loans.
Generous repayment term of up to 20 years.

Higher loan amounts require using your home as collateral.
Not all lenders offer FHA Title 1 loans.
New homeowners must reside in the home for at least 90 days before qualifying for a loan.

FHA 203(k) rehabilitation loans

FHA 203(k) rehabilitation loans are another government-backed mortgage program available for eligible homeowners. The program allows you to combine the cost of buying a home and funds to fix it up with one loan. With an FHA 203(k) rehabilitation loan, you can finance home repairs or upgrades into your mortgage.

The program is helpful if you're looking at a house that needs a lot of work because funds are available upfront to use for repairs. Plus, they're rolled into your mortgage, making the process simpler.

There are two types of 203(k) loans available — standard loans for larger renovations and limited loans for smaller projects.

Combines purchase and renovation costs into one loan.
Low minimum down payment of 3.5%.
Great for fixer-upper properties.
Ideal if you have a lower credit score.

Homeowners must use FHA-approved lenders and contractors.
The application and inspection process can be lengthy.
Renovations must start within 30 days and be completed within six months.

How to apply for home improvement financing

You must apply to receive financing for home improvements. The application process and requirements vary depending on the lender and the type of financing you're applying for.

Here are some general steps to follow to apply for financing for future home improvement projects.

Check your credit: Review your credit score before applying. Lenders use your credit score and other financial information to determine eligibility and interest rates.
Research your options: Explore different financing options, including personal loans, home equity loans, HELOCs and government loans like FHA Title 1 loans.
Compare offers: Shop around and compare interest rates, terms and fees from multiple lenders. Some lenders may let you check rates before applying without negatively affecting your credit score.
Gather financial documents: Prepare necessary documents such as proof of income, employment verification and property details.
Apply for financing: Submit your application either online or in person, depending on the lender’s process.
Review terms and close the loan: If approved, carefully read the financing agreement and ensure you understand all terms and conditions before signing. Complete any final requirements to secure funding and start your home improvements.

How much do home renovations cost?

Home renovation costs can vary greatly depending on the type of project, the materials needed, labor costs and your location. Simple repairs may only cost a few hundred dollars or less. Larger home improvement projects can range anywhere from a few thousand dollars to hundreds of thousands of dollars.

Here are the average costs nationally for common home improvement projects according to Remodeling Magazine’s 2024 Cost vs. Value Report.

Garage door replacement: $4,513.
Midrange minor kitchen remodel: $27,492.
Composite deck addition: $24,206.
Wood deck addition: $17,615.
Siding replacement: $20,619.
Midrange bath remodel: $25,251.
Upscale bath remodel: $78,840.
Roof replacement (asphalt shingles): $30,680.
Vinyl window replacement: $21,264.

Tips for planning home renovations

Home renovations can range from small weekend projects to major remodels. Here are some tips to help you as you plan for upcoming home improvement projects.

Create a budget: Estimate costs carefully, adding a buffer of at least 10% to 20% for unexpected expenses.
Prioritize your needs: Identify renovations that increase both the functionality and value of your home.
Research contractors: If you're hiring someone, thoroughly vet and select licensed, insured contractors with proven expertise and positive reviews.
Plan out your project: Set a realistic timeline for your project, considering factors like time to pull permits, ordering materials and different trades work (electrician, plumber, etc.) involved.
Comply with local regulations: To avoid delays and other complications, ensure that all of your planned renovations comply with local building codes and guidelines and with your homeowners association (HOA) rules.

The AP Buyline roundup

If you have upcoming home improvement projects, you have several financing options to choose from. Whether you’d like to do the work yourself or hire someone, financing home improvements can help you cover the costs even without enough cash on hand.

Compare contractor estimates to find the best options for your home improvement project. Then, review your finances and equity in your home to determine the best course of action to pay for your projects.

Frequently asked questions (FAQs)

How do people pay for their renovations?

There are several ways to pay for home renovations, including credit cards, home equity or personal loans, HELOCs, FHA Title 1 loans or cash.

Is it better to pay cash or finance home improvements?

Cash can help you avoid interest charges if you have enough money saved to pay for your projects. Financing can help you move forward with costlier home improvements if you don't have enough cash on hand.

Can I add to my mortgage for home improvements?

Some lenders may allow you to take out a cash-out refinance, which replaces your current loan balance with a larger loan amount, allowing you to withdraw the difference in cash. Plus, there are second mortgages such as home equity loans and HELOCs, which act as a second lien on your primary home loan.