How to bankroll your home reno

But unlike reality shows with pads that go from glum to glam in under an hour, you’ll need more than design inspiration and good editing. You’ll need time to create a financial plan so that you – and your upgraded home – can be financially awesome.

First up: cost estimates

Homeowners have a slew of options available when it comes to financing renovation projects. Before navigating through them, figure out what you want to accomplish and how much it will cost. The financing you choose will depend, in large part, on the scope of the work at hand.

Develop an initial estimate of project costs, including materials and labor. Doing the work yourself can save considerable sums, but know that in some cases, you’ll need to call in the experts (think electrical or plumbing work). If you do decide to hire someone to do some or all of the work, make sure to do your research and find a reputable contractor. And don’t neglect adding a cushion to absorb unexpected costs.

Financing for the short-term

Some financing options are better suited to smaller projects that don’t require significant amounts of money. Something like a powder room refresh with few materials may even be paid for with cash, avoiding interest charges completely. You’ll just need to plan for it and create a savings fund dedicated to the project.

Credit cards may provide another financing option, if you have strong credit and can score an introductory offer with no interest for six months to a year. Using the card solely for the home reno project can help track costs, and if you’re confident about repaying the card within the introductory period, or close to it, interest charges could be minimal.

Projects with higher costs, like a kitchen makeover, may need more time for repayment, and a personal loan with a five- to seven-year term could be a good fit. A strong credit history will garner the best rates, but they may be higher than what’s available through home equity financing. However, if you’re just starting out and have little equity built up, home equity financing could be hard to come by.

Financing with a longer view

Home equity lines of credit (HELOC) have become popular financing tools in recent years. Lenders allow homeowners to leverage some of the equity in their home for a set period. Homeowners draw out funds as needed and make interest, and perhaps some principal, payments. Once the draw period closes, the money is repaid in installments, including interest.

Some points to consider: HELOC interest rates are variable and tied to the prime rate, so payments can fluctuate. Additionally, some lenders may require a draw at closing. If so, you could be on the hook for interest payments before your project starts.

For a greater certainty in loan payments, a cash-out refinance allows homeowners to refinance their mortgages, adding a sum to cover the cost of renovations on top of their unpaid principal. The loan – for your home and the reno – will be repaid based on the new terms, so you could find yourself paying off a big project over 20 or 30 years.

With a cash-out refinance, qualified applicants generally may borrow up to 80 percent of the home’s current market value. While monthly principal and interest payments would likely increase, the interest rates tend to be lower than on a HELOC.

A home equity loan (also called a second mortgage) provides weekend warriors with a lump sum of cash to spend as needed. It has some distinct advantages over a cash-out refinance. First, it leaves the original mortgage agreement intact, which is particularly important if you secured lower than current rates. Additionally, it comes with a fixed rate, eliminating uncertainty around the direction of interest rates.

Compare reputable lenders

Before swinging the sledgehammer, take the time to do some homework and talk to several reputable lenders to find the best fit for your project. With a solid financing plan squared away, you’ll be able to enjoy your home improvements much more.