Financing Home Renovations: Choosing the Right Payment Method for Your Project

Inflation makes almost any cost a larger investment and home renovations are no exception.

Renovation costs continue to go through the proverbial roof, pun intended, and the numbers are there to support this. The median spending per household had reached $24,000 in 2023 - which is 60% more expensive compared to 2020. Room additions or full kitchen remodels are considered bigger projects and can rack up quite a cost, even upwards of $325,000.

Since it's completely natural for homeowners to improve their space, many scratch their heads puzzled about how to choose between the different financing options to cover these costs. In 2023, 46% of homeowners used cash from savings, while others relied on credit cards or loans like HELOCs. 

Given that homeowners often go over their budget by significant margins, careful planning and choosing the right financing method is crucial for managing both the scope and cost of renovations effectively.

Payment Methods for Renovations: Exploring the Best Options for Your Project

Choosing the right payment method for your home renovations can save you a lot of stress, financial or otherwise, down the line. 

It could be a minor upgrade or a major overhaul, but understanding the ins and outs of various payment methods can help you stay within budget and avoid debt altogether. 

Below, we'll cover different ways to finance your renovations so that you're not financially overburdened.

Personal Loans: Quick Access to Funds

Personal loans are often used option for home renovations. They usually provide access to funds with fixed interest rates and repayment terms - and it's usually the whole sum. These loans are of the unsecured variety. This means they don’t require collateral.

The application process goes quickly, and funds are made available within days. This is a great option for renovations that require mid sums of money.

Interest rates for personal loans depend on your credit score, ranging from 6% to 36%, which can make them more expensive than other options. However, the fixed payment schedule offers predictability, helping you plan your budget effectively?.

Credit Cards: Convenience with Potential Costs

Credit cards are a popular and well-known option, but we would be remiss not to mention them. They are mainly chosen as payment methods for home renovations because they are ubiquitous and you can earn points for cashback. If you want to pay for smaller projects, a credit card can be a smart way to manage payments if it offers a 0% introductory APR. This allows you to spread out payments interest-free for a set period.

The downside is that cards come with flat higher interest rates, typically around 15-25% if not paid off in full by the end of the promotional period. If you have a larger project in mind, it is possible the sum you'll need will be larger and if you're not able to repay it quickly the interest rates might rack up.

But as an advantage you'll have buyer protection which is great if something goes wrong with your contractor or materials?.

eCheck: A Secure and Cost-effective Option

An eCheck, or electronic check, is basically your digital counterpart of a traditional paper check. In terms of what it provides it works just like traditional check does - convenience, security, and cost savings are all at your disposal. When you use an eCheck, your funds will be transferred from your bank account to the recipient’s account via the Automated Clearing House (ACH) network. 

Here comes the sweetest part - eChecks have lower processing fees. Their fees typically range from $0.30 to $1.50 per transaction (this would mean per check). This is great for large payments?.

Then there's greater security through encryption and digital signatures, which reduces the risk of fraud.

The main downside is that processing times are longer. It can take three to seven business days, which may be a drawback for projects requiring immediate payment?. 

Overall, eChecks are ideal for large renovation payments, especially for recurring payments, where reduced costs and security are important considerations.

Home Equity Line of Credit (HELOC): Flexibility for Ongoing Projects

This is a loan practically made for renovations. The loan is taken out against the equity of your home. Ideally, you'll get the sum of money you need and you'll repay it over time with a fixed interest rate. If you have a large renovation in mind this is the loan you'll want to take. Kitchen remodels or room additions are all projects where upfront funds are needed and this loan provides just that - upfront funds.

Since your home serves as collateral the interest rates are lower compared with the other examples we listed above. The bad news is that if you don't repay your loan, you could lose your home and then what was the point of the renovation, so you really need to be sure you can manage the payments.?

Cash-Out Refinance: Refinancing for Renovation Funds

A cash-out refinance is a bit more convoluted than the other examples, but if you're in a very singular situation it can be great. The point of this loan is that you refinance your existing mortgage and when that is done, you then take out cash based on the increased equity in your home. 

Now, in the particular case that the mortgage interest rates are lower, when you originally purchased your home, this option is fantastic because you can consolidate your mortgage and renovation costs into a single payment.

As with any bank procedure, there are closing costs and fees, which can be significant. The takeaway here is to make a careful calculation of the benefits against the costs. This option is best suited for large renovation projects where the lower interest rates and long repayment terms can save you money over time

Contractor Financing: Pay Over Time

There are contractors that offer financing plans, which means you can pay for your renovations directly through the contractor over a period of time. There's a lot of convenience in these plans, since the interest rates are lower or even 0% during a promotional period. If you want to avoid lenders of any description this is the way to go. 

There really are no general terms and rates since they depend on the contactor, so make sure you read the fine print. Contractor financing may not be available for larger, more complex projects.

Endnote

We’ve given a brief overview of the possible financing options for your renovation. It should go without saying that the list does not end there, quite the opposite. There are many more financing options out there and we advise you to research them in detail. 

However, do make sure to plan your renovation project in detail, this will minimize the financial burden you’ll experience.