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Answering all those burning questions you didn’t know you had about home ownership.

4 Options To Finance Your Renovation

Picture of Jessica Dabkowski

Jessica Dabkowski

Helping you with all things homeownership!

Let’s talk options to finance your renovation. You love your neighborhood and everything about where you live, but you wish you could make some changes to your home.  Do you want to update your kitchen so it is less dated and more functional?  Does your bathroom scream 1998 and make you feel anything but spa-like relaxation while you’re in there?

Maybe, like one of my chiropractors, you don’t want to move but you need more space.  They decided to add a second story to their ranch home in a highly desirable location.  (Shout out to Broad Family Chiropractic in Canton!)

Fear not!

You’re not alone!  This scenario is especially applicable to those individuals who purchased a great home in a great area at a great price who doubt they could find something comparable to purchase if they decided to move today.

But many homeowners don’t move forward. They believe financing and lack of cash is a roadblock for them when it comes to renovating their current home.

Below are four financing options that can help you make that renovation come true!

Don’t Overspend

Before you learn more about the details of how to finance your renovation, it is important to decide on the amount of money you can spend on your renovation.  

When I meet with new buyers, instead of asking them what price they can afford, I often ask “What is your monthly budget for owning your home?”  Then we work backwards to get to a price point.  

Same thing here.  All the options I discuss below are effectively a loan. You’ll need to be comfortable making installment payments to finance your updates.

A word of caution:  Carefully consider your improvements in relation to your neighborhood.  If you go overboard, you will not see a return on your investment. The homes around you will effectively cap your sales price when you go to sell. 

That being said, if you’re going to be in your home long term and the update is about your quality of life, you may be perfectly happy to spend that money in return for the joy the updates bring to your life.  

Go into it with your eyes wide open.  If you have any doubts regarding how your improvements will result in an increase to your home value, you can consult a reputable, smart, friendly, charming and loyal real estate agent.  (*COUGH*)

Here are four financing options you can consider to finance updates to your home: 

  • Home equity loan
  • Renovation financing loan
  • Cash-out refi

1. Tap Your Home’s Equity

A home equity loan with a second mortgage allows you to take a loan based on your home’s equity plus other factors such as your income.

Remember, the equity in your home is the difference in the home’s current market value and the balance left on your mortgage.

You know in the movies whenever that guy takes out a “second mortgage” to do something risky and ridiculous?  Yeah, this option is that second mortgage.  That being said, making updates to your home is allowing you to increase the home’s value.  You are essentially backing up your loan with this increase in value.  (Unlike the movie guy, who followed a hot tip, went to the track but no one told the horse. He has no increase in home value.)

Home Equity Loan Pros

Once approved, you get an upfront lump sum. You must repay a certain amount each month subject to a fixed interest rate. 

It will be a fixed monthly payment, just like a first mortgage with a fixed-interest rate.  This allows you to plan for your payments well into the future.  The length of the loan is shorter than first mortgages, usually five to fifteen years.

This second mortgage can be a great way to tap into your equity and use it to improve your home’s value.  It is a viable option for those of you who have a low interest rate on your first mortgage and don’t want to do a cash-out refinance on that first mortgage (see #4 below). 

The interest is generally tax deductible, but as always, check with your tax advisor.  As much as I love finding the tax loopholes, I am not a tax adviser.  

If the current interest rate is low on your first mortgage, then you can keep that mortgage if rates have increased.  This new second mortgage would be a completely separate mortgage from your current one.

Home Equity Loan Cons

Typically that second loan’s interest rate is slightly higher than the market interest rates available.  The rate is higher because a second mortgage is riskier for the lender. If you’ve been reading my articles, you know “the man” always covers his rear end.

You’ve also now added an additional monthly mortgage payment.

Same as a first mortgage, if you can’t pay back the loan, you risk losing your home.  You need to know you can comfortably make the payments each month.

Also, you must pay back the loan in full when you move or you’ll need to get a new loan to pay back this loan.  Don’t get too alarmed – just like your first mortgage, you can pay off this loan with the proceeds (which should be increased!) from the sale of the home.  

2. Home Equity Line of Credit (HELOC)

Similar to the Home Equity Loan, a Home Equity Line of Credit (HELOC) allows you to tap into the equity you have built up in your home.  The difference is the HELOC is a line of credit (similar to a credit card) and not a loan.

This option functions almost like a credit card — you can withdraw money when you need it over the lifetime of the line of credit and then pay it back.  HELOCs can stay open up to 10 years.  

Your payments change based on how much of a loan you’ve taken out as well as the current interest rate..


You only pay interest on the amount you withdraw and not on the total amount approved. Interest rates are usually lower than credit cards, and payments are tax deductible.  

This is a great option for folks who are going to be able to pay off the line of credit with an upcoming bonus or sale of another home.  (Just make sure your employer doesn’t enroll you in the Jelly of the Month club in lieu of a bonus this year.)

Just like the second mortgage, you can leave your current mortgage alone at a low interest rate if you have one. No need to mess with a good thing, this HELOC would be an additional loan and seen as short term because of the variable rates.

The HELOC is a great option if you can pay off the amount you borrow pretty quickly either through selling another property, an upcoming increase in income or bonus.  


Credit lines have variable interest rates rather than fixed rates so your repayments can change depending on the interest rate at the time you withdraw money. 

I personally get a little antsy whenever my financing revolves around the interest-rate whims of the Fed.

You should carefully review all requirements, fees, penalties and how often the interest rate is adjusted since HELOCs can vary depending on the lender.

3. Renovation Financing Loan

If you don’t have much equity in your home, you can consider a renovation loan. The lender bases the loan on what your home will be worth once the renovation is complete.

For this loan, you refinance your current home and add on the amount needed for the renovation to the same loan. So it is one large loan, not a second mortgage.

This loan requires that you work with a contractor and architect and not do any DIY work. Rather than getting a lump sum directly to you, the lender is the one who pays the contractor as the work is done.

Renovation Financing Pros

You don’t need equity in your home now because the loan is based on the value of the home once the renovation is complete.  

Monthly payments on these loans are typically lower than credit cards or personal loans. And the interest is tax deductible.

Renovation Financing Cons

Your mortgage balance will increase since you are refinancing with a larger amount. The lender has more say over the timeline and process of the renovation. This money is only used for a renovation with a contractor, who the lender pays directly.

4. Cash-Out Refinancing

This financing option bases your loan on what the home is worth now, not when the renovation is completed. So you’ll need equity in your home.

A cash-out refinance is a good option for people who have been in their home awhile who have

  • paid down their mortgage balance over time,
  • experienced an increase in home equity due to the housing market increasing the home’s value, or
  • put an extra large downpayment on their home when they purchased it and thus have a smaller mortgage balance relative to their home’s value.

The lender will have your home appraised for current value.  They will use this appraised value to write you a new mortgage. Generally, the lender will write the mortgage for up to 80% of the home’s appraised value.  

When the refi closes, the lender will pay off your old mortgage completely.  Any amount over the old mortgage comes back to you as cash.  

Again, you’ll want to ensure the mortgage payment for the new loan is an amount you can comfortably pay each month.  Under no circumstances should you let the lender tell you what you can afford!

The cash-out refi can be a good option if interest rates are low or have gone down recently. You’ll be able to take advantage of lowering your interest rate while at the same time tapping into the equity of your home for the renovation. It’s like a “two-for-one special” of the loan world.

Verify that interest rates are lower than your original loan.  If not, it may make more financial sense to do one of the other options.

Cash-Out Pro

The amount needed for the renovation is given directly to you in one cash payment rather than having the lender pay the contractor. You have more flexibility with this financing. This scenario is beneficial if you are doing more than one project in your home or you are DIYing some of your updates like a badass. (So proud of my DIY badasses!)

Cash-Out Con

Keep an eye out for interest rates so you don’t get a higher one than you have now. The goal is to be financially savvy here.

Choose Carefully for Your Situation

Remember to choose a financing option that works well for you in both the short and long-term.  Weigh the pros and cons of all viable options to finance your renovation.

Having the ability to stay in your current home and neighborhood with a renovation can be a huge plus for many homeowners. That being said, be aware of the time, energy and possible displacement that living through a renovation entails before you move forward and start the process.

Reach Out

As always feel free to reach out to me.  I’m here to help you with any real estate related questions, even if you aren’t buying or selling anytime soon.  I can help you determine what renovations would be good investments and which you might not get your money back on if you plan to sell in the next few years.   

Photo by Tima Miroshnichenko from Pexels

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