Home Projects Funded
Owning a home comes with ongoing maintenance and occasional major renovation projects. While upgrades like kitchen overhauls, bathroom remodels, and room additions greatly enhance living spaces, these projects often come with big price tags. Given tight budgets, how can homeowners fund needed home improvements?
From tapping home equity to personal loans, this guide explores smart ways to finance major home projects. We will cover loans, credit products, and alternative financing options to turn the home of your dreams into a reality.
Before examining financing, let’s look at why homeowners undergo major renovations and upgrades:
- Update functionality – Remodel kitchens, baths, and systems to meet changing household needs.
- Enhance enjoyment – Finished basements, exterior upgrades like pools bring fun for the family.
- Increase home value – Kitchen overhauls, additional bedrooms, and baths help resale value.
- Reduce costs – New windows, doors, appliances, and roofing lower energy and maintenance costs.
- Accommodate life stages – Add mother-in-law suites for aging parents or remodel kids’ rooms.
- Customize aesthetics – Granite counters, hardwood floors, and additions add personal style.
Home projects tailor spaces to each homeowner’s unique needs, lifestyle, and design tastes. Improving comfort, functionality and aesthetics makes for an enjoyable living experience.
Popular Home Improvement Projects
While possibilities are endless, the most common major home upgrades include:
- Kitchen remodels – Cabinetry, counters, appliances, flooring, island additions, knocking down walls.
- Bathroom remodels – New tub/shower, vanity, lighting, tile, fixtures, reconfiguring layout.
- Exterior upgrades – Siding, windows, stonework, shutters, patios, decks, pools.
- Basement finishing – Framing walls, carpeting, lighting to convert into livable space.
- In-law suites – Turning basement or attic into separate apartment for relatives.
- Room additions – Expanding existing or adding brand new bedrooms, office, conservatory, garage.
- System upgrades – New roof, HVAC, electrical, plumbing, insulation, solar.
Kitchen and bath overhauls along with finishing basements tend to provide the biggest return on investment when selling. But all projects can significantly enhance functionality and enjoyment while living in your home.
Home Renovation Costs
Project costs vary based on scope, materials, and location but typically range from a few thousand dollars for modest upgrades to six figures for luxury renovations.
- Minor kitchen remodel – $20,000
- Major kitchen remodel – $50,000 – $150,000
- Bathroom remodel – $10,000 – $35,000
- Master suite addition – $100,000 – $250,000
- Basement finish – $20,000 – $70,000
- Inground pool – $35,000 – $100,000
- Backup generator – $5,000 – $15,000
- New roof – $6,000 – $12,000
Get quotes from multiple licensed contractors to understand likely costs given your specific project vision. Be sure to build in contingencies as unexpected issues can arise.
While not cheap, renovations add exponentially more value and enjoyment than their price tag. Choosing the right financing strategy makes managing costs feasible.
Home Equity Loan or HELOC
The most common way homeowners fund major renovations is by tapping into home equity – the portion of your home value you own outright vs. any remaining mortgage owed. Options include:
Home Equity Loan
- Fixed amount loan based on % of home value and income
- Fixed interest rate and set repayment term
- Interest usually tax deductible
- Predictable payments
- Potentially lower rates
- Simpler application
- Less flexible
- Closing costs and fees
HELOC – Home Equity Line of Credit
- Revolving credit line based on equity
- Variable interest rate
- Draw funds as needed up to limit
- Only pay interest on what you use
- Flexible draw amounts
- Interest often tax deductible
- Payments vary based on use
- Rates may climb over time
- Closing costs and fees
Leveraging equity you’ve built offers a smart way to fund renovations while rates remain relatively low. Shop options to compare fees, rates and terms.
Cash-Out Mortgage Refinance
Besides a home equity loan or HELOC, homeowners can access equity through refinancing:
- Refinance mortgage to higher balance
- Cash from increased loan pays for renovations
- Makes new larger mortgage payment
- Combine renovations into overall low mortgage rate
- Consolidate payments into one
- May skip HELOC/loan costs
- Resets mortgage term to 30 years
- Closing costs for new loan
- Risks home if can’t repay
This approach consolidates higher mortgage payment with project costs. But it restarts your mortgage timeline which may not be ideal if you had paid down principal already.
Beyond home equity, personal installment loans present another option:
- Fixed amount loan not tied to home or assets
- Set interest rate and repayment term
- Unsecured so based on income/credit
- Predictable set payments
- May offer lower rates than credit cards
- Unsecured if don’t want to risk home
- Requires strong credit
- Limits on loan amounts
- Debt remains if selling home
While not risking your home, unsecured personal loan limits and rates depend heavily on your credit profile. Poor credit means higher rates or denial. But they provide fixed payments and terms that can assist planning.
0% Credit Cards
For smaller projects, 0% intro credit cards can minimize interest:
0% Intro Credit Card
- Credit card with 0% intro APR
- Make charges interest-free during promo period
- Minimum monthly payments
- No interest for 12-18 months
- Easy to qualify if good credit
- Can earn rewards points
- Balances flip to high rates after intro period
- Credit limit may not fit large projects
- Need disciplined repayment before deferred interest hits
While not suitable for mega-renovations, 12-18 months of 0% financing gives time to pay back reasonably-priced projects before interest accrues. Just be sure to pay off balances fully before the intro rate expires.
Retirement Account Loans
An alternative some homeowners consider is borrowing from retirement funds:
401(k) or IRA Loan
- Borrows money from your retirement account
- Usually repaid over 5 years at low interest
- Interest goes back into your account
- Low interest rate
- Payments replenish retirement balance
- Lost growth while funds borrowed
- Penalties if lose job and can’t repay
- Taxes/penalties if under 59.5 when borrowed
While low rates are appealing, the big downside is missing market returns on money withdrawn during the loan. This can significantly slow long-term growth. Use retirement funds only as a very last resort.
Alternative Financing Options
Beyond traditional loans, a few other creative ways to fund home renovations include:
Credit Card Rewards – Rack up sign-up bonuses and cash back rewards to offset some costs. Just be sure to pay off balances during 0% intro periods.
Crowdfunding – Start a campaign making your project pitch to raise small donations from a large number of backers.
Home Equity Sharing – Sell a share of your home’s equity to an investor in exchange for project capital and split later appreciation.
Signature Loans – Borrow from family/friends at set terms. Be sure to document clearly and make contractual.
County Funds – Research grants, subsidies or low-cost loans for home repairs available in your county or state, especially for lower-income households.
DIY Sweat Equity – Save substantially by taking on work yourself. But know your limits.
With creativity and diligent research, you may discover financing options beyond standard loans that mesh well with your situation.
Choosing the Best Financing Option
With many possibilities for funding home renovations, here are key factors to consider when selecting the best approach:
- Interest rates and fees – Lower rates save significantly over time. Watch origination fees some loans charge.
- Loan amount needed – Match loan amounts and terms to project scale.
- Timeframe for repayment – Know the repayment deadline and total years to pay off.
- Risks if can’t repay – A fixed rate installment loan may be safer than putting your home at risk.
- Credit profile – Know the minimum score needed to qualify and get ideal rates.
- Tax implications – Mortgages and some home equity loans offer tax deductible interest.
- Retirement impact – Don’t jeopardize your retirement savings growth.
Compare multiple options simultaneously so you can optimize both loan features and the overall timeline for repayment that works best.
Tips for Managing Project Costs
Once you’ve secured financing, a few tips help contain costs:
- Get quotes from 3 contractors and review examples of their work before selecting.
- Read all contracts closely and don’t feel pressured into signing on the spot.
- Add contingencies to contracts allowing extra cushion for unforeseen expenses.
- Understand what is and isn’t covered if the project goes over budget.
- Communicate regularly with contractors to resolve any issues immediately as they crop up.
- Inspect work at multiple stages and sign-off before final payment is made.
- Don’t make changes along the way that inflate the scope and price tag.
- Be willing to do certain basic work yourself like painting to save on labor costs.
Overseeing the project timeline, budget, and contractor relationships takes diligence. But smart management can maximize your investment and satisfaction.
Is a Home Equity Loan Tax Deductible?
Yes, interest paid on a home equity loan or HELOC is usually tax deductible. The key factors:
- Loan is secured by your primary residence
- Proceeds are used to make home improvements
- Total debt secured by the home remains under $750,000
Up to $100,000 in home equity debt can be deducted under the above criteria. This write-off helps offset rising interest expenses. Consult a tax pro to understand how equity financing fits your situation.
Just keep in mind if you take a cash-out mortgage refinance, the deductible interest amount would apply to your entire new first mortgage, not a separate home equity loan.
Common Home Improvement Financing Mistakes
While financing opens doors for home renovations, beware these common mistakes:
- Not budgeting for contingency overages, which inflates costs
- Over-improving for the neighborhood, limiting return on investment
- Taking on more debt than comfortable monthly payments allow
- Refinancing mortgage and restarting timeline when close to paying off
- Using retirement savings and missing growth over the loan term
- Signing loan documents without reading closely and asking questions
- Not shopping rates across multiple lenders
- Choosing the contractor with the lowest bid without vetting quality
- Failing to document agreements clearly with family/friends if borrowing from them
- Starting projects without sufficient savings set aside to cover the full costs
With proper planning, oversight, and smart financing, home improvements provide lasting returns. But reckless spending and borrowing can make for regret down the road.
Renovation Financing Tips
If considering financing home renovations, keep these tips in mind:
- Research options beyond just your current bank or mortgage lender and compare quotes.
- Model repayment timeframes and total interest costs, not just monthly payments.
- Understand the deductibility of interest and tax implications.
- Keep financing terms as short as feasible to limit interest expenses.
- Avoid borrowing more than 80% combined loan-to-value on the home.
- Consider setting up automated payments to increase on-time payments.
- Make payments on time and pay down balances quickly to limit compound interest growth.
- Be conservative with estimates and leave padding in budgets for unknowns.
- Ask lenders to explain any legalese and fees that are unclear upfront.
While renovations add enjoyment and value to a home, funding carries responsibility. Setting realistic budgets and clear repayment plans prevents financial pitfalls down the road.
The road to your dream home starts with a solid financing plan tailored to your budget and priorities. With an array of options from low-rate loans to smart do-it-yourself savings tactics, capitalizing on home improvement projects is achievable. Just be sure to shop around for the best rates, understand the tax implications, and borrow conservatively based on a prudent budget and repayment timeline you can manage.
With thoughtful planning, diligent management, and financing that fits your unique situation, home upgrades provide comfort, functionality and added equity for years to come. Turn aspirations into reality by funding home projects the smart way.