It takes planning, organization, and maybe a little bit of bravery to step into a home improvement project, no matter the size. While it may be a little nerve-wracking, especially if it’s a more costly project, if you do your research and stay organized there is little reason to worry when you finally begin. A good way to alleviate some of the stress is to have all of your financing in order before you start.  

There are six main ways that people typically pay for large-scale home improvement projects: Mortgage Refinancing, Home Equity Line of Credit, Home Equity Loan, Personal Loan, Credit Card, or Cash.

Mortgage Refinancing

Mortgage refinancing is all about freeing up extra cash to start your renovation project. Basically, refinancing replaces your current home loan with a newer one. The new one typically offers you the opportunity to reduce the current interest rates you are paying (depending on market conditions) or cut your monthly payments in general. The money you save can then be put toward your improvement project.

Home Equity Line of Credit

Because you own your home, you are typically allowed to borrow against the value of your house. Unlike refinancing this does not include continuing to pay off your mortgage. This is a separate loan, or a line of credit, with a schedule and repayment date. With this approach, you usually have a specified number of years to draw on the loan followed by another set number of years to pay it back. You don’t need to take out all the money you need for a project at one time but rather can take out what you need as you need it. If you don’t end up drawing on all of the money then you don’t need to pay interest on all of it either.  

Home Equity Loan 

Unlike an equity line of credit, an equity loan is a lump sum of cash rather than taking out money as you go along. This loan typically comes with a fixed interest rate, so there won’t be any surprises as you make monthly payments over time.  

Personal Loan

It is not always necessary to use your home as collateral when it comes to financing a home improvement project. It’s important to understand that interest rates can be higher when you take out a personal loan versus a home equity loan, and personal loans have to be paid back in a much shorter period of time. However, if your credit is good but you don’t have much equity in your home, this may be a more convenient option. 

Credit Card

Like anything else, many home improvements can be paid for on credit cards these days. If you don’t have all the cash the project requires upfront this may help give you the time to get the full amount together. It may also be a great way to rack up some rewards points, depending on your card perks. However, it’s important to be sure you will be able to pay off the balance in a timely manner since interest rates are often higher on credit cards than they are for other types of financing. 

Cash

Cash is always the simplest form of payment. Paying with cash means you won’t have to deal with interest rates later on, that you will be more likely to stay within your budget, and that you know in advance that you have the ability to pay for the project you are beginning. 

Every decision when it comes to financing a home improvement project is a very personal one. Oftentimes we see home equity loans offer the lowest interest rates, but no situation is identical for everyone. The most important thing is to have your financing bases covered before setting a project in motion. While it is not necessary to have all your financial decisions made before picking a contractor (obviously full costs won’t be known until a contract is in place), it can be helpful to at least know which direction you want to go in advance, to offer you extra peace of mind.