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3 Smart Ways to Finance Home Improvements

by Karen Gibbs |March 30, 2023

Strategic home improvements can make your space more comfortable or aesthetically pleasing, and on top of that, they can potentially increase its resale value.

But before you price lighting fixtures or select a new paint color, you'll want to evaluate how you'll cover the costs — and if you have more extensive remodeling plans, that may mean borrowing against the value of your home instead of paying outright. Read on for a breakdown of three options to do that.

Home equity loan

Best suited for single projects like a room addition, this loan provides a lump sum of funding that you'll repay over five to 30 years. Repayments are monthly 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

Home equity line of credit (HELOC)

With this option, funding is readily available as needed, so it can be a fit for financial needs that are spread out over time. During the draw period, which can last up to 10 years, typically the homeowner is required to pay only 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 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:

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 is part of your new monthly mortgage. 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 can be a good choice 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 to 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.
Father and son painting the walls in their home

What if you're short on home equity?

If you need funds 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:

  • The interest rate may be fixed or variable.
  • Typically you're charged an origination fee of 1% to 8% of the loan value, and payment penalties may apply.

Keeping the bottom line in mind

Whether you choose to use your home's equity or a cash-out refi to finance your renovations or opt for a personal loan, know that home updates are more than eye candy. Think about both the current and future needs of your family, as well as features that are universally appealing to potential buyers, when picking your projects; that way, you'll not only get more out of your spaces but will also strengthen and secure your investment.

— With additional reporting from Life and Money by Citi editors

Karen Gibbs

is a lifestyle writer from New Orleans, LA. She has written for a variety of online and print publications, including, 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.