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5 Ways to Finance Your Home Renovations in 2021

5 Ways to Finance Your Home Renovations in 2021
4 min. read

Image: udra11 / Shutterstock.com

Having spent a lot more time at home than usual throughout 2020, it’s perhaps only natural that interest in home improvements and renovations rocketed. Perhaps staying home has opened your eyes to the maintenance you’ve been putting off, or inspired you to grab some tools and get to work.

However you plan to renovate your home in 2021, you’ll need a way to pay for it. Fortunately, there are several options, each with their own pros and cons. Here, we’ll take a look at the best options.


Applying for a Home Equity Line of Credit (HELOC) is a common way to cover your expenses, especially if you’ve already built up 20% equity in your home. HELOC works similarly to a credit card, in the sense that you can draw funds more than once, while paying back the borrowed amount and interest in monthly installments. There are two terms to a HELOC:

  • The draw period, which can last between 5 and 10 years, and during which you can withdraw funds as and when needed;
  • The repayment period, which can last up to 20 years; during this phase, no further withdrawals can be made, and you will be expected to pay the principal as well as the interest on your loan.

HELOC can be very appealing due to its flexibility, as well as the lower closing costs and monthly payments. Often, home renovations can result in unplanned expenses, and HELOC allows you to take out as much or as little as you need in order to pay for them.

Home Equity Loans

If your home renovations are very costly, or they require you to have a lump sum ready in advance, a home equity loan is a good choice. Unlike HELOC, where you borrow smaller amounts over the course of several years, a home equity loan provides you with the full amount upfront. As a result, it’s a better choice for financing major renovations and repairs on your home.

Home equity loans tap into your existing home equity (you will need a minimum of 20%), which is used as collateral by your lender when applying for a loan. They are relatively easy to obtain, come with fixed interest rates, have lower closing costs than cash-out refinancing, and if you’re using them for renovations, they are also tax-deductible.

The main thing to remember when applying for a home equity loan is that it is, essentially, a second mortgage. So if you find yourself in a position where you can’t meet your monthly repayments, this can lead to a foreclosure.

Cash-out Refinancing

Homeowners who have a lot of equity in their home and also want to benefit from low interest rates will find cash-out refinancing very tempting. If the value of your home is higher than what you owe, you can refinance your mortgage and keep the difference between the old and new loans. Depending on the difference between the two, you can end up with at least $100,000 that you can splurge on renovations. As a result, cash-out refinancing is perfect for large projects and even expansions.

Cash-out refinancing and home equity loans have some similarities, so it’s important to decide which is the best choice for a home renovation. If you’re planning to renovate and then sell the house, or relocate, a home equity loan is a better choice. Also, cash-out refinancing may have lower interest rates, but the closing costs are much higher than those of a home equity loan.

Credit Cards

If you’d rather not tap into your home equity to pay for renovations, getting a credit card is a better option. This is also a great choice if you have small scale projects planned, or if you simply want to freshen up your home décor. Applying for a new credit card is quick and painless, and many lenders may even throw in perks such as preferential introductory rates. Also, they’re a common way to improve your credit score, while also freshening up your home.

However, credit cards are not perfect. One of the drawbacks is the interest rate, which is higher than in the case of home equity loans. Not only that, but late payments can result in late fees and even penalty APRs, which can build up to almost 30%.

Government-Backed Loans

One last financing avenue worth exploring is checking if you qualify for any government-backed loans. For example, the Federal Housing Administration (FHA) is offering the Title 1 loan, which can be used specifically for home renovations and repairs, as well as buying home appliances. Similarly, the FHA 203k loan can be used for both repairs, and even buying a home that’s in need of some rehabilitation. These loans don’t require you to have any home equity, and might be your best bet if you have a lower credit score.

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