Home improvements are a great way to add to the value of your property, all while making it a more comfortable place to live. And although renovating your home can seem like a significant upfront cost, it may be more financially beneficial than you think.
The average American homeowner is missing out on $196,199 in untapped potential by not renovating, according to the real estate insights company Realm.
In select cities, the untapped potential is even greater. Homeowners in Summit Park, Utah have the most average untapped home equity — they're missing out on nearly $850K by not updating their homes. Five cities in California made the top 10, and you can see the rest of the cities with the most untapped potential on the map below:
Even if you don't live in one of these areas, you can still stand to benefit by updating your home. Especially if you plan to move in the next few years, it's important to make sure your home is contemporary so you can sell for top dollar.
Home renovations are an expensive upfront investment, but there are several ways to finance a home remodel if you don't have the cash to cover costs. Consider your options, including loans and refinancing, in the analysis below.
If you decide to borrow money to finance home improvements, be sure to shop around for the lowest possible interest rate you can get. You can compare rates on a variety of financial products without impacting your credit score on Credible.
3 ways to pay for a home renovation project
The best way to pay for home improvements is to save up in advance and pay in cash, but remodeling can cost tens of thousands of dollars. It may not be possible (or convenient) to wait years to renovate while your home becomes more outdated. Thankfully, there are a few convenient ways to finance home improvements:
- Unsecured home improvement loans
- Cash-out mortgage refinancing
- Home equity loans or HELOCs
Compare your options in each section below, carefully considering the benefits and drawbacks of each one.
Unsecured home improvement loans
There are several options for borrowing loans for home improvement. First, check with your county to see if you qualify for Home Improvement Program (HIP) loans or other federal home renovation loans through the Department of Housing and Urban Development (HUD). These types of loans may have strict eligibility requirements and program restrictions, so read the fine print to see if they're right for you.
Some homeowners also choose to borrow unsecured personal loans to finance home repairs and renovations. Unlike some of your other financing options, personal loans don't require collateral. That means you don't risk losing your home if you don't repay the loan.
Personal loans offer a lump-sum loan amount that's repaid in fixed monthly payments over a set period of time, typically a few years. Funding is fast, and you may be able to receive your loan in just a few business days.
Personal loan interest rates are fixed, which means they won't unexpectedly rise after you've locked in your loan terms. They're also dependent on your creditworthiness, so you'll want to work on improving your credit score to get the lowest rates possible.
You can use a personal loan calculator to see how much your monthly payments would be. If you decide a personal loan is right for you, browse the table below to see estimated interest rates from real lenders. Get prequalified on Credible to see offers tailored to you without impacting your credit score.
Cash-out mortgage refinancing
Mortgage refinancing is the process in which you take out a new home loan to pay off your old mortgage. With home equity at record highs across the country, you may be able to borrow significantly more than what you currently owe on your mortgage.
Let's say you have $200,000 left on your mortgage, and your home is worth $300,000. You could potentially take out a new $250,000 mortgage and use the extra $50,000 to put toward home renovation costs. This way, you can secure a relatively low interest rate while you pay for home improvements.
Keep in mind that mortgage refinancing comes with closing costs. Plus, you should be careful of borrowing more than your home is truly worth — you can't borrow more than your home would appraise for.
Mortgage refinance rates are near record lows, which makes it a great time to utilize a cash-out refinance to remodel your home. You can compare mortgage refinancing offers from multiple online lenders at once on Credible's online marketplace.
Home equity loans vs. HELOCs
Another common way to pay for home renovations is to take out a home equity loan or home equity line of credit (HELOC). Home equity loans and HELOCs let you borrow against the equity you've built in your home. But whereas cash-out refinancing replaces your home loan with a new one, home equity loans are actually a second loan in addition to your first mortgage.
The rate and repayment term on your current mortgage will stay the same, and your home equity loan or HELOC will have new terms altogether. Home equity loans let you borrow a lump sum of cash, and HELOCs are revolving credit lines that you can withdraw from as you see fit. Both are types of secured loans that use your home as collateral, so you have the potential to lose the roof over your head if you don't repay the loan.
The amount you can borrow in a home equity loan will depend on your credit score, debt-to-income (DTI) ratio and loan-to-value (LTV) ratio.
Find out more about using and calculating your home equity on Credible.
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