7 surefire ways to pay for any remodeling project

By ,
Ask a Lender
February 13, 2018


Key Points

7 ways to pay for your remodeling project

  • Cash-out Refinance
  • Home Equity Line of Credit (HELOC)
  • Second Mortgage Cash-Out (Home Equity Loan)
  • Personal Loan
  • Credit Card
  • Cash
  • Cryptocurrency (Bitcoin, Ethereum, etc.)

Remodeling a kitchen or bathroom can breathe new life into your home. Or, if you’re looking to sell your home, a strategic remodel can help you woo homebuyers and increase your home’s value.

The only problem with a remodel is figuring out how to pay for it. Fortunately, it’s a problem with many solutions — and seven of the best solutions are here.

1. Cash-out refinance

Most people turn to refinancing to get a better rate on their mortgage. But if you have a lot of equity in your home, you can turn that equity into cash with a cash-out refinance.

In a cash-out refinance, you take out a new mortgage for more money than you need to pay off the original home loan. You receive the difference in cash that you can use for pretty much anything, including a remodeling project.

Because you’re taking out a new mortgage, you’ll have to pay closing costs. Therefore, a cash-out refi makes the most sense if you plan to stay in your home for a longer period of time, say, more than two to three years. If you’re planning to sell your home in a year or two, a better option may be a home equity line of credit.

2. Home equity line of credit (HELOC)

Home equity lines of credit (HELOCs) have been in the news recently: The 2017 tax overhaul largely eliminated tax benefits for homeowners with HELOCs or home equity loans. But HELOCs can still be an attractive option for homeowners looking to remodel their homes, especially those who plan to sell their home within a year or so.

Most HELOCs come with an adjustable interest rate, which means the rate adjusts every month. When interest rates are on the rise — like they are now — it’s generally not the best idea to take out an adjustable-rate loan, because the rate will probably increase. But if you’re remodeling your home to make it more attractive to homebuyers, it can actually be beneficial to go with an adjustable-rate HELOC.

HELOC rates are usually fixed for a certain period of time — typically around six months, but sometimes up to a year. During that time, the rate is usually lower than what you’d find with a fixed-rate mortgage, such as a cash-out refi. If you use the proceeds of the HELOC to make improvements to your house, and then sell it before the introductory rate expires, you won’t have to worry about the rate going up in the future, and you’ll have saved money thanks to the lower interest rate.

3. Second mortgage cash-out

A second mortgage cash-out, also known as a home equity loan, is similar to a HELOC in that it’s a way to borrow money against the equity in your home. Whereas a HELOC is a credit line with a variable rate, a second mortgage cash-out generally comes with a fixed rate and a fixed term.

The interest rate on a second mortgage cash-out tends to be a little higher than a HELOC’s introductory rate, but lower than that of a longer-term mortgage. The term on a second mortgage cash-out is generally only between three and seven years, which can be a good thing: With a shorter term, you’ll pay less interest over the life of the loan. Your monthly payment may be higher than it would be with a longer term, however.

4. Personal loan

If you don’t have much equity in your home, you might consider taking out a personal loan. Because personal loans aren’t backed by collateral like a HELOC or cash-out refi, which are secured by the equity in your home, you most likely will end up paying a higher interest rate. Because personal loans are unsecured, you need good credit to qualify for one.

5. Credit card

You could use a credit card to pay for renovations, but you should explore other options first. Credit cards tend to have high interest rates, and that means you’ll incur costs far above and beyond the initial cost of the remodel. Like HELOCs, credit cards come with variable interest rates, which means your initial rate may increase over time.

6. Cash

If you have the cash on hand to pay for a remodel or renovations — or can save it up in a reasonable amount of time — it’s an option that’s difficult to beat. You won’t incur any origination fees or interest charges with cash. You just have to have the patience to save it up.

7. Cryptocurrency

The most cutting-edge way to pay for … well, anything … is with cryptocurrencies such as bitcoin, Ethereum, Ripple or Litecoin. If you hold some of these volatile digital assets, you can always cash them out to pay for renovations to your home. Be aware of the tax implications, however. If you cash out your crypto-coins, you’ll be liable for capital gains taxes come tax time.

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