Home 3 Smart Ways to Finance Home Improvements

by Karen Gibbs | June 15, 2020

A home mirrors the personalities of those who fill that space. As family needs change, a house must also adapt — and grow like those living there — to meet those changes.

A spare bedroom becomes a home office. A play yard transforms into an outdoor kitchen. A den is remodeled as a nursery for a new baby. Such improvements not only increase a home's resale value, they also fill practical needs and enhance comfort. There's no denying it, a house that truly supports its family's lifestyle helps strengthen the bonds of those who live there, too.

As you envision your living space, it’s important to know which improvements best increase the value of a home — financially, aesthetically, functionally — and what makes the most sense for funding these projects.

Consider renovations with upside

If you're looking for renovations that add most to a home's value, check out those that increase curb appeal. For example, according to a 2020 report by Remodeling magazine, a $9,657 stone veneer adds $8,943, or 95.6% of its cost, to the home's value. A new garage door costing $3,695 adds $3,491, or 94.5% of its cost to the home's value. 

While such upgrades are financially smart, there's more to consider than money. Some renovations add such happiness and comfort to a family, they're priceless.

A new bathroom, for example, that costs $49,598 may boost a home's value by only $26,807, or 54% of its cost, but the extra convenience and comfort it brings is incalculable. Likewise, an outdoor deck may cost $14,360 yet add only $10,355 to the home's bottom line, but the pleasure it adds to family and friends is worth even more. 

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While such upgrades are financially smart, there's more to consider than money.
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Check out financing options

Before you price lighting fixtures and select that new paint color, evaluate how you’ll cover the costs. If you are unable or don’t wish to pay for your remodel outright, you'll want to look into smart financing options. These include a home equity loan, a home equity line of credit and a cash-out refi. 

1. Home equity loan

In a home equity loan, money is received in a lump sum and is repaid over five to 30 years. This type of loan is best suited for single projects like a room addition. It is repaid through a consistent monthly payment in addition to your first mortgage payment, if you have a first mortgage. 

Key considerations:

  • Interest rate remains fixed over the life of the loan.
  • Closing costs can run 2% to 5% or more and include credit reports, title search, appraisal and attorney fees. 
Woman works on remodeling her bathroom

2. Home equity line of credit (HELOC)

This option is best suited for financial needs that are spread out over time, as money is readily available as needed. During the draw period, which can last up to 10 years, the homeowner is typically only required to pay the interest on the amount borrowed.

During the repayment period, the balance due may be paid in a single payment (balloon payment) or in regular payments spread over 10 to 20 years. There may be a prepayment penalty or an early closure fee if the HELOC is closed before a designated period of time and the lender paid some or all of your closing costs. 

Key considerations:

  • The credit line’s interest rate may vary up and down — typically in step with changes to the so-called prime rate set by the Federal Reserve.
  • Some lenders may charge an origination fee ($25 and $1,000 or a percentage of the draw amount). Others may charge closing costs when the HELOC is established. Lenders might also elect to charge a borrower a fee in the event of an early closure but not charge any closing costs. 

3. Cash-out refinance

A cash-out refi replaces an existing mortgage with a new, 15- to 30-year home loan for an amount over and above the existing mortgage balance. The amount of cash above the mortgage balance is given in one lump sum and repayment consists of one monthly mortgage payment. Depending on the term, interest and amount of the loan, the monthly payment can be higher, lower or the same as the current mortgage payment.

A fixed-rate cash-out refi is a good choice to consider when current fixed interest rates are lower than your existing mortgage rate. In fact, even if you are not thinking about home improvements, refinancing your existing mortgage (without cashing out) may be a measure you should consider if rates drop well below that of your existing loan.

Key considerations:

  • Interest rates can be fixed or adjustable and they're usually lower than those of home equity loans.
  • Closing costs are similar to those of the original mortgage — credit report, appraisal, attorney fee and origination fee.

Understanding the full refinancing picture

As with any loan, you'll want to consider setting alerts or establish autopay to make sure that you meet payment deadlines. This is true for home equity loans and lines of credit. Remember, too, that the homeowner’s property (the house itself) serves as the collateral used to secure the financing.

Stacy Johnson, founder and CEO of Money Talks News, suggests that homeowners also factor in the potential influence financing may have on their credit picture. "Both home equity loans and lines of credit could impact your credit score,” says Johnson. “An untapped line of credit could lower your credit utilization ratio, which can boost your score. On the other hand, too much available credit can negatively impact your score," notes Johnson. So you'll want to be sure that you are within the limits that are right for you.

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You'll want to be sure that you are within the limits that are right for you.
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Short on home equity?

If you need money for minor home improvements but are short on equity, consider a personal loan. In contrast to a home equity loan or a HELOC, a personal loan does not use property as collateral so you won't risk losing your home if you default on the loan. Lenders consider your income, debt and credit reports when making the loan. 

Key considerations:

  • Interest rate may be fixed or variable.
  • An origination fee of 1% to 8% of the loan value is typically charged and payment penalties may apply.

Home sweet home

When planning to spruce up your home, think about the current as well as the future needs of your family. That way, your home will grow and evolve in step with the ever-changing demands of your family. Also, consider using your home’s equity or a cash-out refi to finance renovations.

By leveraging your home equity to make improvements, you'll not only add to your family's comfort and enjoyment, you'll also strengthen and secure your investment. Whichever option you choose, know that home improvements are more than eye candy. They make for a true "Home Sweet Home."

Father and son painting the walls in their home
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Karen Gibbs

is a lifestyle writer from New Orleans, LA. She has written for a variety of online and print publications, including TODAY.com, Bed Bath & Beyond, New Jersey Family and Inside New Orleans magazine.

The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.