Whether it’s a facelift or a full-on remodel, you’ve decided it’s time to give your home a refresh. But you might not have the cash on hand to gut your kitchen or upgrade your curb appeal — and that’s okay. If you’re taking on a major (or minor) home project, now’s your opportunity to get to know your options for financing home improvements.
1. Home equity line of credit (HELOC)
HELOCs could be an option for you if you are taking on a long-term or multi-phase home renovation, such as finishing a basement or putting on an addition.
Home equity lines of credit (HELOCs) are similar to home equity loans. Both let you tap into your home’s equity, and you usually need at least 15% to 20% equity to qualify. But HELOCs work a bit differently and can be more flexible. Instead of providing a one-time sum of cash, HELOCs allow your home’s equity to act as a source of revolving credit that you can use when you need to — sort of like a credit card.
One major difference between credit cards and HELOCs is that some lenders may require you to withdraw a minimum amount of your credit limit. For example, a lender could require a minimum draw amount of $50,000 or 75% of your approved maximum credit amount, whichever is greater. That means if you qualify for a $100,000 HELOC, the minimum draw amount will be $75,000.
HELOCs often have variable interest rates, and the loan has two phases: the draw period and repayment period. During the draw period, you can use your available credit as needed by writing checks or using a card connected to the line of credit. Then, during the repayment period, you can no longer draw funds, and your monthly payments include principal and interest.
It’s important to keep in mind, as a secured loan, HELOCs are backed by your home — so any missed payments can put your home at risk of foreclosure. HELOCs also may have closing costs along with additional fees, such as an annual fee and early termination fee.
2. Cash-out refinance
If you prefer to avoid taking out a loan for your home improvement, a cash-out mortgage refinance is an option that could help you access thousands of dollars. With this type of refinance, you’re also tapping into your home’s equity. You get a new mortgage with an outstanding balance that’s higher than your current one, and you receive the difference between the two loans in cash. To qualify for a cash-out refinance, you typically need to have at least 20% equity in your home.
A cash-out refi can make sense for larger projects, like a kitchen reno or room addition. For smaller projects (like new light fixtures or replacing the front door), a rate-and-term refinance might help you lower your monthly payment and free up cash in your monthly budget. With this type of refinancing, you replace your original mortgage with a new one — typically with a different interest rate and repayment term. This option may only lower your monthly payment if you extend your loan term (or keep it the same with a lower interest rate).
Use our free Mortgage Refinance Calculator to calculate your potential monthly payments.
3. Credit card
For smaller projects — you know, replacing bathroom tiles as opposed to your whole plumbing system — you might consider financing with a credit card. Many credit cards offer low-to-no interest rates for the first few months, so if it’s a project that you can pay for in just weeks (not years), you could possibly avoid owing any interest at all.
If your credit card offers great cash-back or points for your spending, this could help you reap those rewards. But if you aren’t in a 0% APR (annual percentage rate) introductory period, you’ll want to pay off your project quickly because credit card rates can be exceptionally high compared to other financing options.
4. Save and pay cash
If you want to avoid dealing with loans, fees, interest and more, you could opt to pay for your home improvement in cash. To help you save faster, consider using a high-yield savings account.
With Ally Bank’s Savings Account, you can take advantage of smart savings tools like buckets and boosters. Store your savings in a bucket exclusively for your renovation or repair and stay on top of exactly how you’re tracking against your goals.
No matter if you’ve been planning to install an in-ground pool or you’re suddenly faced with a roof repair, you have several financing resources to improve your home.
