What Is the Best Way to Finance Your Home Improvements?

A renovation loan has advantages compared to other finance options: credit card loan, personal loan, cash-out refinance, home equity line of credit, and second mortgage.

You’ve got some great ideas for turning your current less-than-perfect home—or a fixer-upper you’re planning to buy—into your dream home. But how do you come up with the bucks to do it? Here’s a summary of several options, including our renovation loan.

  1. CREDIT CARD LOAN. Historically, this is the most popular option:
    • Interest rates as low as 0% and short-term financing, usually 24 months.
    • After 24 months, you can get hit with all that interest that has accrued over the past 24 months.
    • You would have a very large payment to pay off within 24 months. For example, a $60,000 project divided into 24 equal payments = $2,500 per month.

  2. PERSONAL LOAN. This is a personal, unsecured line of credit of up to $80,000:
    • Higher rate and longer term (up to 10 years) than a credit card loan, but lower monthly payment.
    • For example, if the interest rate is 8% for a 10-year loan on a $60,000 project, the payment will be about $630 per month.

  3. LEVERAGE YOUR MORTGAGE with a cash-out refinance, second mortgage, or renovation loan:
    • Cash-out refinance: This is the most popular way to leverage your mortgage. As an example, if your house is worth $100,000 and you owe $60,000 on your current mortgage, then you have $40,000 equity or 40% equity. You must retain 15% equity in the house, so the most you would be able to borrow against this house is $25,000 for a cash-out refinance.
    • Second mortgage: If you already have a good rate on your current mortgage, you may not want to refinance it. You just want a second mortgage, which can come in two forms:
      • A home equity line of credit (HELOC) is a revolving, open-ended line of credit that is attached to your house. It is securitized by your house and works just like a credit card. As you use it, you pay it off; the amount that you have paid off becomes available to you to use in the future.
      • A home equity mortgage (second mortgage) is a close-ended loan. You’re limited to the amount of equity you have, and you would still typically be required to retain 15% equity in your home.
    • Renovation loan: With Academy’s “all-in-one” renovation mortgage, the purchase (or refinance) and renovation are combined into one loan—just one application, one closing, and one monthly payment.
      • With the cash-out refinance and second mortgage options, you borrow against what your house is currently worth ($100,000 basis). With a renovation loan, you borrow today against what the house will be worth after the improvements are made ($150,000).
      • In our renovation loan scenario, your reserve equity requirement is only 5%, not 15%. Subtracting the 5% equity reserve ($7,500) and existing mortgage balance of $60,000 from $150,000, you would be able to borrow $82,500 for repairs, compared to only $25,000 with the cash-out refinance and second mortgage options.

Compared to the other options, an all-in-one Academy renovation loan usually gives you more money, a possible tax deduction, and the convenience of having the purchase (or refinance) loan and the renovation loan combined into just one loan. It’s a great way to turn your dream home into reality!
