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- A home improvement project may be a smart way to avoid a pricey move across town, but that doesn’t mean your project will be cheap. Due to the high price of remodeling, many people wind up borrowing the cash they need.
- Home equity loans and personal loans come with fixed interest rates, fixed monthly payments, and fixed repayment terms, making them a good option for homeowners who hate surprises.
- If you want to borrow money for home improvement and think you could repay it in less than 15 months, consider a 0% APR balance transfer card that offers zero interest on purchases.
Dreaming of a new kitchen? A master bathroom with double sinks? A room addition to give your family more space? These are all worthwhile goals that could improve the value and utility of the home you have now versus having to move. The problem? Home improvement projects aren’t cheap, and in some cases, they can be downright expensive.
According to Remodeling Magazine’s 2018 Cost vs. Value Study, the average mid-range kitchen remodel rang in at $63,829 in 2018. Even the average minor kitchen remodel cost consumers $21,198.
Want a new deck? A wooden one would set you back an average of $10,950 that year, while a mid-range backyard patio came in at a cool $54,130 on average.
You get the point. Remodeling your home can be a pricey affair — even if the result is worth it in the end. For that reason and others, many consumers opt to borrow money for home improvement projects.
If you’re gearing up for a big project around the house and know you need funds to make it work, make sure to research your options ahead of time.
How to borrow money for a home improvement project
1. Home equity loan
Home equity loans allow you to borrow a lump sum of money while using the value of your home as collateral. You can typically only borrow up to 85% of your home’s value, however.
If your home is worth $300,000 and you have a first mortgage for $200,000, for example, 85% of the home’s $300,000 value is $255,000. Since you’ve already borrowed $200,000 of that value with your first mortgage, you would likely only be able to borrow up to an additional $55,000 with a home equity loan.
Home equity loans come with a fixed interest rate and fixed repayment term, which means you’ll also get a fixed monthly payment that never changes. You can also borrow money for up to 30 years, and the interest may be tax deductible if you itemize on your taxes and use the money to make substantial improvements to your home.
Read more: A home-renovation loan can help you turn a fixer-upper into your dream house, but not without risks
Note that if you’re considering a home equity loan, you’ll want to compare offers yourself. According to the Federal Trade Commission, there’s a known scam around home equity loans where a contractor or builder shows up at your door and offers their services on a renovation project for what seems like a good price, and offers to help you finance it through someone they know. This “someone” may end up being a lender offering a home equity loan with unfavorable terms that aren’t disclosed until after the work has begun.
If you decide to pursue a home equity loan, do the research yourself.
Pros of home equity loans:
- Predictable monthly payment, loan term, and interest rate
- Borrow up to 85% of the value of your home
- Many home equity loans have low fees or no fees
- Competitive interest rates
Cons of home equity loans:
- You’re putting your home up as collateral, so you could lose your home if you fail to repay
- Some home equity loans do have fees
- You need a lot of home equity to qualify
- Consumers who need to borrow a large sum of money and pay it off over time
- Anyone who wants a fixed monthly payment and no surprises
- People with considerable home equity to borrow against
What kind of mortgage rates could you get? Consider these offers from our partners:
2. Home equity line of credit (HELOC)
Home equity lines of credit, which are also called HELOCs, work similarly to a credit card. They work as a line of credit you can borrow against, and you only have to repay the amount you actually use. Like credit cards, HELOCs typically come with variable interest rates that are based on an index and may change over time.
Since HELOCs use your home as collateral, interest rates tend to be lower than other unsecured loan options. Keep in mind, however, that you can typically only borrow against your HELOC during an initial draw period that normally lasts 10 years. After that, you’ll move into a repayment period where you can no longer borrow money.
Pros of HELOCs:
- Only borrow what you need
- Competitive interest rates based on an index
- Many HELOCs come with low fees or no fees
- You may be able to deduct interest on your taxes if you use the funds for major home improvement projects
Cons of HELOCs:
- Your payment will fluctuate based on how much you borrow
- Variable APR has the potential to surge
- You need considerable home equity to qualify
- Consumers who aren’t sure how much they need to borrow for their project
- People with considerable home equity to borrow against
- Anyone who wants a loan with low fees
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3. 0% APR balance transfer credit card
While regular credit cards are a poor option for any project since they come with an average APR over 17%, balance transfer cards that offer 0% APR on purchases can be ideal for small home improvement projects. Keep in mind that some balance transfer cards only offer 0% APR on balances transferred from other cards or loans, so you’ll want to look for cards that extend the 0% APR to purchases, too.
There are a surprising number of 0% APR credit cards that fall into this category, including options that offer zero interest on purchases for up to 15 months. You can even earn rewards on your home improvement purchases with some cards in this category.
With the Wells Fargo Propel American Express® card, for example, you get 0% APR on purchases for 12 months and 20,000 points worth $200 after you spend $1,000 within three months of account opening. (then a variable APR of 15.49% to 27.49% applies) You’ll also earn 3x points on eating out and ordering in, gas stations, ride shares, transit, and travel along with 1x points on all other purchases — and all without an annual fee.
Pros of 0% APR credit cards:
- Enjoy zero interest on your home remodeling purchases for a limited time, usually up to 15 months
- Some cards that offer 0% APR for a limited time also let you earn rewards
- Balance transfer cards are easy to research and apply for online
Cons of 0% APR credit cards:
- Your interest rate will reset to the standard APR after your introductory offer is over; this could be as high as 24.99%
- You only get 0% for a limited time, making this a poor option for people who need years to pay their home remodeling project off
- Your monthly payment will surge based on how much you spend
- People who need to borrow a small amount they can repay in 15 months or less (before their interest rate resets)
- Consumers who want to earn rewards on their home improvement spending
- Someone who wants to leverage their project to earn a sign-up bonus on a credit card that also offers 0% APR on purchases
Learn more about the Wells Fargo Propel from our partner The Points Guy »
Courtesy of Tania Griffis
4. Personal loan
Personal loans are also popular for home improvement projects since they offer some of the benefits of home equity loans without as much risk. Personal loans are unsecured, meaning they don’t require you to put down any collateral. This means that, if you fail to repay, you’re not putting your home on the line like you would with a home equity loan or a HELOC (even though you will negatively impact your credit score).
Read more: Personal loans 101: How they work and who can qualify for them
Personal loans also come with fixed interest rates, fixed repayment timelines, and fixed monthly payments — meaning you won’t have any surprises along the way. Also note that, since you’re not borrowing against your home equity, you can take out this type of loan regardless of how much you owe on your mortgage provided you meet other requirements your lender sets.
Pros of personal loans:
- Fixed interest rate and monthly payment
- You don’t have to put your house up as collateral
- You may be able to borrow more since your loan limit isn’t based on home equity
Cons of personal loans:
- Interest rates may be higher since these loans are unsecured
- Some personal loans charge fees, although many do not
- The best rates and terms typically only go to those with good or excellent credit
- Consumers who want to remodel their homes but don’t have a ton of home equity
- People who need to repay their loan slowly over time
- Anyone with good or excellent credit who can qualify for the best offers