What's the best way to pay for home renovations? (2024)

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Since the onset of the coronavirus pandemic, renovations have become a higher priority for people, as we're all spending much more time at home. A recent study from Groundworks Companies found that 20% of homeowners plan to use their tax refunds for home improvements this year, compared to just 10% in 2019.

In the past, the plan to "one day" turn the spare bedroom into an office or add a deck to your backyard might have been lower on the priority list than, say, taking a memorable family vacation. But now, as people adapt to having the whole family work, play and go to school under the same roof, home renovations feel like less of a luxury and more of an immediate need.

When financing such large projects, be it a new kitchen or an upgraded basem*nt-turned-schoolroom, you usually have the option to pay cash, finance the costs with a loan or use a credit card and earn rewards.

Select spoke with two financial experts to get their take on how to select the best payment method for your budget.

Mark Reyes, CFP

Los Angeles
Cash, credit or loan? Cash

New homeowner and Albert financial planner Mark Reyes recently renovated his backyard. Reyes and his wife chose the project as their first major undertaking after the coronavirus hit, and they hope that having a nice outdoor space will allow them to see more of friends and family safely in 2021.

The couple paid for the project in cash, even though they could have used a rewards credit card to earn points or miles.

Paying in cash ensures that you can actually afford the purchases you're making, and you don't get stuck with what Reyes calls "toxic" (or high-interest) debt. It requires some patience, as most people need several months or years to save up the money to pay for a renovation, considering the low-end average cost of a kitchen remodel is $10,000.

Cash is also usually preferred when you're hiring local contractors, which was important to Reyes given how hard the recession has hit small business owners. Paying in cash (or check/e-check) often costs contractors fewer processing fees, and they are often able to access the money faster.

To get a jump-start on saving, sign up for a budgeting app like Mint or PocketGuard that lets you create specific savings goals. Deposit your cash into a higher-yield option like the Ally Online Savings Account, which offers above-average interest rates on all balances, no minimums and zero monthly fees.

But before you decide to drop a lot of cash on a home improvement, Reyes suggests asking yourself a few questions to make sure you're not getting in over your head:

  1. Is there room in your current budget to afford a one-time or recurring payment? Even if you pay cash, projects can take months, so map out your spending plan according to the payment schedule your contractor lays out for you.
  2. Do you still have enough in your emergency fund? Even though Reyes advocates using cash for home improvements, he does not recommend pulling from your emergency fund to cover these kinds of costs. Make sure you have at least three to six months' worth of cash put aside before you drop thousands on a major project.
  3. Is your debt under control? If you have high-interest debt hanging over your head, but a large pot of cash to spend on a home improvement project, it's probably in your best interest to hit "pause" on the project and pay the debt off first. (Here's how much credit card debt can cost you if you only pay the minimum.)

If you meet these requirements, Reyes says that you can confidently move forward with the project, especially if the purchase or project will improve your lifestyle.

"A backyard renovation really resonated with us because it was very important," Reyes tells Select. "We have a laundry list of things that we want to work on in the house, but we found that because of quarantine, a new backyard was at the top of our list."

New homeowner Mark Reyes and his wife opted to pay in cash for a new fence and upgraded yard to host friends and family safely outside their new home in Los Angeles, Ca.

Photo courtesy of Mark Reyes, CFP

Jeanne Fisher, CFP

Nashville, Tennessee
Cash, credit or loan? Home-equity line of credit (HELOC)

"For home improvement, I'm a big fan of the home equity line of credit, or a HELOC," Nashville-based planner, Jeanne Fisher, tells Select.

A HELOC is a revolving credit line (meaning it stays open, even when you've paid off what you borrowed) that is tied to the amount of equity you have in your home. You won't get 0% financing, but interest rates do tend to be lower since your home's equity is being used as collateral.

Typically, you can open a HELOC only after you've built up at least 20% equity in the home, and your credit limit will be limited based on how much you've paid on your mortgage.

But with these considerations aside, HELOCs are a convenient way to access credit when you need it and pay it back over a flexible timeline.

Most notably, using a HELOC helps you track your home improvements, argues Fisher — which will come in handy when you eventually sell the home. Every time you borrow from the revolving HELOC to pay for a project, you create a paper trail documenting how much money you put into upgrading your home. A realtor can easily look at your documentation later and turn those upgrades into easy selling points.

Keep in mind that, while HELOC interest rates tend to be lower than credit cards (the lowest available right now is 2.49% according to Bankrate), rates are variable and can increase/decrease from month to month.

Also watch out for fees associated with opening a HELOC, including costs to appraise your home's value and originate the credit line.

Bottom line

Before you take on costly home improvements, make sure your emergency fund is stable and you've paid off any high-interest debt. If you've got the wiggle room in your budget, save up to pay for home improvements in cash, or use a revolving HELOC if you need some flexibility.

If a HELOC is unrealistic for you (either you don't have enough equity in your home, or you don't want to take on extra fees), consider using a 0% APR credit card to finance home repairs over a period of several months. With the Chase Freedom Unlimited®, you could qualify for up to 15 months of no-interest financing on new purchases and balance transfers to cover the cost of your project (after, 20.49% - 29.24% variable APR; there's a intro balance transfer fee of $5 or 3% of the amount of each transfer, whichever is greater in the first 60 days. After that it's either$5or5%of the amount of each transfer, whichever is greater.)

And if you've just moved into a major fixer-upper, you may also want to look at a home improvement store card. Though store cards can have their drawbacks, such as low credit limits and high interest rates, homeowners with a laundry list of to-dos could benefit from the Lowe's Advantage Credit Card, which offers an everyday 5% discount on eligible in-store and online purchases.

Read more

3 ways to save money on spring cleaning costs

Here are the best credit cards for remodeling a home

The best credit cards to help you transition to working from home

Information about the Lowe's Advantage Credit Card and Pocketguard has been collected independently by Select and has not been reviewed or provided by the issuer of the cards prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

What's the best way to pay for home renovations? (2024)

FAQs

What's the best way to pay for home renovations? ›

Homeowners have various financing options available to fund home renovations and improvements, including but not limited to cash savings, home improvement loans, home equity loans, or a home equity line of credit (HELOC).

How do people typically pay for home renovations? ›

Homeowners have various financing options available to fund home renovations and improvements, including but not limited to cash savings, home improvement loans, home equity loans, or a home equity line of credit (HELOC).

What is the 30 percent rule for home renovation? ›

Home renovation is a huge undertaking, and almost invariably takes more time and costs more money than homeowners expect. Rasekh says it's a good idea to set 20 to 30 percent of the total cost of your project aside for the unexpected — that's up to 30 percent on top of the project's original cost estimate.

How do I figure out how much to spend on a renovation? ›

To get an approximate idea of what your remodeling budget should be, consider the value of your home as a whole. You don't want to spend more than 10 to 15 percent of your home's value on a single room. If you spend more, the value of the renovation will not proportionally add to the value of your home.

Are renovation loans a good idea? ›

A renovation loan can be worth it if it will help you improve the value and livability of your home without costing too much. If you want a loan with quick funding that doesn't require you to use your home as collateral, getting a personal loan for renovations could be a good decision.

What does Dave Ramsey say about home renovations? ›

Home renovations can be a big expense on top of the other costs of owning a home. Ramsey suggests doing one project at a time, saving up for repairs, doing the work yourself when you can, and bartering for repairs.

Do people pay on home renovation shows? ›

Almost all home renovation shows—save your Extreme Home Makeovers and other more charitable productions—require the homeowner to pay for their own renovation. This means footing the bill for everything from the materials to the permits to the dumpsters, not to mention the porta potty workers use on-site.

What adds the most value in a renovation? ›

5 Home Improvements That Can Increase Your Property Value
  1. HVAC Cooling and Heating Systems. HVAC systems can be very costly to install or upgrade. ...
  2. Garage Door Replacement. ...
  3. Exterior Stone Veneer or New Vinyl Siding. ...
  4. New Entry Door. ...
  5. Minor Kitchen Remodel (Midrange)
Mar 4, 2024

Can you write off renovation costs? ›

To qualify for federal tax deductions, your home renovations must meet specific IRS criteria, such as medically necessary modifications or energy-efficient upgrades. If you qualify, you will need to fill out the applicable forms to submit with your taxes.

What is the rule of thumb for renovation costs? ›

While a variety of factors impact a project's cost, you can use a rule of thumb to get a general idea of the required budget. Remodeling experts estimate a kitchen renovation costs around 15% of your home's value. So, if your home is valued at $200,000, the budget for an updated kitchen is approximately $30,000.

Is $100,000 enough to renovate a house? ›

Examples of What You Can Achieve with a $100,000 Budget

A comprehensive kitchen renovation, including new cabinetry, countertops, and appliances. A full bathroom remodel, with upgraded fixtures, finishes, and tiling. A room addition, such as a bedroom or family room, depending on the complexity and scale of the project.

Is 50K enough to renovate a house? ›

A more realistic budget would be around $50,000 – this allows you to do more than make changes in only one space. For under $50,000, you can make several renovations to a home and increase its value significantly, especially if you know how to cut costs without compromising on quality.

How to cut costs on home renovation? ›

12 Ways to Save on Home Renovation Costs
  1. Create a Budget. Before you begin your home improvement project, it's vital to have a detailed budget. ...
  2. Get Your Permits in Order. ...
  3. Reuse Materials. ...
  4. Buy Materials Yourself. ...
  5. Shop at a Building Supply Reseller. ...
  6. Do Your Own Painting. ...
  7. Consider Knockoffs. ...
  8. Refinish Your Floors.
Jul 12, 2023

Is it hard to get approved for a renovation loan? ›

Unlike home equity loans, personal loans for home improvement are often unsecured and are based solely on your credit profile. Those with excellent credit and a steady income are most likely to get approved, but some lenders cater to applicants with bad credit.

Who has the best interest rates on home improvement loans? ›

Summary: Best Home Improvement Loans
CompanyForbes Advisor RatingAPR range
SoFi®4.08.99% to 29.99%
LightStream4.06.99% to 25.49%
LendingPoint4.07.99% to 35.99%
Upgrade3.58.49% to 35.99%
May 31, 2024

What is a remodel loan called? ›

An FHA 203(k) Renovation Loan is a government-backed mortgage that combines the costs of a home purchase (or refinance) with the costs of home renovations. The FHA 203(k) Renovation Loan offers homeowners and home buyers an easier way to pay for home remodeling costs.

How much do Americans spend on home renovations? ›

Home improvement budgets and spending

Americans spent a sizable chunk of change on home renovations in 2023, more so than a year prior. The median spend on home renovations totaled $24,000, a 60% increase from 2020, according to the Houzz study.

Do renovations pay off? ›

Dream It, Build It: The Power of Strategic Renovations

Plus, it can often provide a great return on investment down the line. A significant portion of the cost can be recouped from future owners in the form of increased property values if you choose the right project to enhance your living space.

Are renovations worth it? ›

With a full kitchen renovation, homeowners can recoup about 59% of the cost, and a new master suite will typically return 50%, according to a study from the the National Association of Realtors and the National Association of the Remodeling Industry. But the highest returns come from less flashy projects.

What is a renovation mortgage? ›

A renovation mortgage is a type of mortgage that includes funds for home repairs and improvements. Maybe you want to move into a neighborhood with stellar schools, but the only way you can afford that is by getting a property in less-than-ideal shape.

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