How to pay for home improvements

As the winter fades away and a new season begins, you might have more than just spring cleaning in mind; you also might be looking for more of a home refresh.

That can take the shape of making home improvements, home repairs and/or renovations. Doing so can help you enjoy your space more while also potentially increasing the value of your home.

Depending on the type of project and your local real estate market, you might be able to recoup most, if not all, of your investment. Sometimes you can even raise your home's value by more than what you spend on projects, given the time savings and overall appeal you could provide to the next buyer. For example, $3,600 in curb appeal upgrades, like yard care, returns around $14,800 in resale value, according to HomeLight.

But what if you don't have the cash to make these home improvements, especially for more expensive upgrades, like remodeling a bathroom or kitchen?

Some homeowners find that tapping into their home equity gives them the flexibility they're looking for to make home improvements. While you'll want to weigh factors like financing costs and the risks of not being able to afford the repayment, you might find that borrowing against your home equity makes sense for your situation.

You can easily explore your home equity loan options online now to see how much you're eligible to receive.

How to pay for home improvements

For homeowners with equity in their homes here are two options to consider to help pay for home improvements.

HELOCs

A home equity line of credit (HELOC) is a revolving line of credit that you can draw from over time, rather than all at once. In that sense, a HELOC is similar to a credit card, where you don't have to borrow up to your full credit limit, but you have that option. And as you pay off your balance, your credit limit refreshes.

Meanwhile, HELOC interest rates tend to be far lower than credit card rates. HELOCs in March 2023 tend to be somewhere in the ballpark of 7-8%; credit card rates average roughly 20%, and personal loans are around 11%, according to the Federal Reserve. So, if you're looking to borrow money for home improvements, a HELOC could be more affordable.

And unlike some other types of loans, like a personal loan, a HELOC's structure means that you can space out your borrowing. Perhaps you want a few thousand dollars in cash for sprucing up your backyard to enjoy during the spring and summer. Then, maybe you'll want to draw from your HELOC again before next winter to refinish your floors as you prepare to spend more time indoors again.

And if you end up needing money unexpectedly, like if a kitchen appliance breaks and you don't have a home warranty policy, then you might be able to get that money from your HELOC.

Check your local HELOC options here now.

Home equity loans

Another option to consider is a home equity loan, which is also often called a second mortgage. This type of financing gives you a lump sum loan based on your home equity, and unlike a HELOC, it has a fixed interest rate.

Home equity loans have an average interest rate of around 8%, as of March 2023. So, while that might be a little higher than some HELOCs, you also don't have to worry about interest rates going up, which could make paying back HELOCs more expensive.

In other words, if you want to have more security regarding what your monthly payments would be when paying back what you borrow, you might prefer a home equity loan. Since the funding comes as a lump sum, you might use a home equity loan for larger projects, like redoing your kitchen or adding an addition to your house. 

You can easily check your home equity loan options online today.

The bottom line

Both HELOCs and home equity loans tend to let you borrow up to 85% of your home's combined loan-to-value ratio, which generally means that your current mortgage debt plus the new financing can add up to 85% of your home's appraised value.

Both also carry risks in the sense that if you can't repay what you borrow, the lender could foreclose on your home, so you'll want to be responsible when taking out any equity. 

Other types of home equity financing also exist, such as a cash-out refinance or a reverse mortgage. A cash-out refinance involves replacing your current mortgage with a new, larger one that nets you cash. But that's not always advantageous, such as to a homeowner who pays a lower mortgage interest rate on a fixed-rate mortgage, compared to what the market currently offers.

And reverse mortgages are only available to older homeowners. Reverse mortgages don't have to be paid back until you no longer live in your home, but these loans can end up degrading your home equity.

Instead, it could make sense to pay for home improvements with a home equity loan or HELOC. Shop around to see what your borrowing options are and compare that with the benefits you can get from making some upgrades to your home.