How to Finance Your Home Improvements and Renovations

December 11, 2019


Nothing compares to the comfort of home, until you start noticing room for improvement, that is. Perhaps recently, you’ve looked around and noticed room for improvement.  A leaky roof, high energy bills, or a kitchen straight out of the 1970s may be nagging reminders there’s still work to do to transform your house into your dream home. But renovations can be costly. 

It can be a bit overwhelming, but even if you don’t have enough savings to cover everything you’d like to fix, repair, or replace, you still have several financing options. Here are some things to consider:

Determine your Home Renovation Cost

Home Improvement Loan Options

Determine Your Home Renovation Cost

First and foremost, decide on the project you want to tackle, maybe a kitchen remodel or installation of energy-efficient doors and windows. You can use a home renovation cost calculator to get national averages of your renovation costs, or contact a contractor for a more accurate estimate. 

There are a few factors to consider when setting a budget for your home renovation. The first is to build in wiggle room so you can plan for financial surprises like finding out your plumbing isn’t to code and other expensive fixes.

Another important consideration is how much your home renovation would add to the overall value of your home. Adding major landscaping may not have much impact compared to adding a new energy-efficient heating and cooling system, for example.

Home Improvement Loan Options

After you’ve nailed down the cost of your renovation, it’s time to investigate your financing choices.

Personal Loans and Lines of Credit

One option you’ll have at your disposal is a personal loan.

Unsecured Personal Loans

A personal loan is usually unsecured which means you don’t have to put any other assets up as collateral to receive this loan. The loan is structured as a lump sum and can be used however you wish.

Unsecured personal loans are riskier in the eyes of lenders, so they typically carry higher interest rates as a way to mitigate risk.  You also need a good credit rating to be approved for a personal loan. Those with poor to “ok” scores will likely be turned down.

Secured Personal Loans

A secured personal loan is another option that may offer a lower interest rate in addition to a bigger loan amount. Of course, there’s a catch - you must borrow against your assets, aka collateral, which  carries the risk of losing your collateral if you fail to make your loan payments.

Home Equity Loans

A home equity loan, also called a second mortgage, allows homeowners to take out a loan against the equity built up in their property. Let’s imagine your home is valued at $500,000 and you have $450,000 left to pay off on your primary mortgage loan. You would have $50,000 you could borrow against.

These loans are typically structured as lump sums with a fixed interest rate and identical monthly payments for the life of the loan.

The biggest drawback homeowners must consider before signing on the dotted line is that there is a risk of losing the home if you fail to make their loan payments. However, this is true of all loans where you’re borrowing against the value of your home.

Home Equity Line of Credit (HELOC)

Although home equity loans and home equity lines of credit (HELOCs) are sometimes used interchangeably, they are different financial products. The difference between a HELOC and a home equity loan is that instead of borrowing a sum of money all at once, a HELOC allows you to draw on a line of credit up to the maximum credit limit on an as-needed basis. This means homeowners access cash only when the money is needed rather than taking out a big sum all at once. The borrower pays back only what’s borrowed plus interest - similar to how a credit card works. 

A HELOC may be a good option for home improvement projects because it gives homeowners more flexibility than a traditional loan. Borrowers can withdraw funds and make payments on a weekly or daily basis with this option.

The amount you can get with a HELOC is determined by several things: your debts and credit health, and the value of your home and your mortgage balance.

One drawback of a personal line of credit is that it can be hard to track how much money you’ve taken out. If you draw a little here and there over time, those small withdrawals can quickly add up - like your credit card balance if you’re not paying attention to all those lattés and meals out. 

Other drawbacks include annual fees for keeping your HELOC open (even if you don’t withdraw funds), variable interest rates which can make monthly payments fluctuate, and if your home decreases in value, you could owe more than what it’s worth.

Cash-Out Refinance

A cash-out refinance is another option where the borrower takes out a new home loan larger than the existing mortgage and converts the difference between the old loan and the new one into cash.

Cons of a cash-out refinance include the risk of losing your home if you fail to make payments - similar to the consequences of other types of financing where you’re borrowing against your home. Other drawbacks include high closing costs which fall around 2-5% of the mortgage, private mortgage insurance if you borrow against more than 80% of your home’s equity, and possibly receiving worse terms than your original mortgage (paying a higher interest rate, for example).

PACE Financing

If the options available above don’t make sense for your financial situation or home renovation, you may want to consider PACE financing. What is PACE financing?

PACE financing isn’t a traditional loan, it is a secure alternative that provides homeowners with money upfront which is repaid over a certain time period - usually between five and twenty years. It’s financing that is based primarily on your home’s equity and gets repaid through property taxes. Because of this, it’s classified as a special tax or assessment assessment rather than a loan. PACE financing can be used for a wide range of energy-efficient, renewable energy or resiliency home improvements.* 

This financing option is a straightforward approach for homeowners looking to improve their homes but want better terms than other more traditional loans and lines of credit can offer. 

There are several PACE providers, and Ygrene is the premier PACE provider for homeowners. This is a great longer-term option with unique benefits from traditional forms of financing.

Benefits of Ygrene PACE financing include:

  • No money down, no upfront costs on your home improvements
  • Contractors don’t get paid until you’re satisfied
  • Longer-term options, lower monthly payments, and fixed rates
  • Financing can be repaid early with no penalty fees
  • No minimum credit score required
  • Payments made on an annual basis with your property taxes

If you’re interested in learning more about this unique option and to see if it’s right for you, you can get started today to check your qualifications for PACE financing.

Financing Your Home Renovation

When you have the price tag of your dream home improvement staring down at you, it can be a little overwhelming figuring out how to finance it. With a little due diligence and research, you can find financing that fits your renovation budget with the terms and conditions that meet your needs. Ygrene offers homeowners the opportunity to finance a variety of projects from installing wind-resistant roofing to getting started on a solar energy panel addition. With this guide in hand, you can be confident you can make the right choice for your home and financing needs.