Paying for a Home Reno Without Upfront Cash: 5 Financing Options Explained

Pining for new fixtures in the guest bathroom? Dreaming of doing an Insta-worthy kitchen makeover? 

Home remodeling is on the rise, according to a recent Trulia survey, with 90% of homeowners planning to renovate at some point. They’re also planning to spend a fair amount, too, with 20% of remodelers saying they’re willing to spend more than $10,000 on their home improvement projects. (For reference, here are the five most profitable ones to take on.)

But before demo day arrives, you need to carefully consider which sources of cash to tap. In other words, don’t stop at comparing accessibility and interest rates. You also need to take into account loan terms, taxes and the consequences if you’re unable to repay the money you owe.

Here’s the HerMoney breakdown of loan options to help you decide:

Borrowing from Your 401(k) 

It’s tempting to borrow from a workplace retirement account — like a company 401(k) or 403(b) — particularly if you’ve built up a nice balance over the years. According to Fidelity, there are a record number of 401(k) millionaires out there. But even if you’re one of them, you should grab a hard hat and proceed with extreme caution before you crack open your nest egg.

Why? Borrowing from this tax-advantaged account is not a great option unless you have more than enough saved for retirement, says Melanie Nichols, a Certified Financial Planner and Co-Founder of Warren Averett’s Women’s Wealth Connection. 

HerMoney need-to-know: “Borrowing from your 401(k) for a home renovation can be a permanent hit to the growth of your retirement savings,” says Tendayi Kapfidze, Chief Economist at LendingTree. “People are often seduced by the feature that they are paying themselves the interest if they borrow from their 401(k), but that is at the risk of giving up higher returns that they may [earn] in their 401(k).” Plus, most people who take out loans from their 401(k) don’t contribute to their account during the loan payback period, Nichols says, so they end up missing the tax deferral and any company match they could be getting during this time, (a.k.a. they’re losing out on free money).

Another reason to leave your cash in your 401(k) instead of borrowing against it for a new kitchen sink: If you lose your job or change employers, that loan will come due almost immediately. If you can’t pay it back by the deadline, you’ll be hit with taxes and penalties. Ouch.  

Cash-Out Refinance 

A cash-out refinance home loan involves rolling the amount you still owe on your mortgage — plus any additional money you want to borrow — into a new loan. You’ll pay the same interest rate on borrowed funds no matter how you use the money. Also, if you’re still itemizing, the interest you pay may be tax deductible.

HerMoney need-to-know: With this type of financing, your home is being used as collateral. If something goes wrong — say you lose your job and can’t afford the loan payments — the roof over your head is at risk. Meaning that the bank could foreclose on your home. Another less dramatic inconvenience to consider, according to Kapfidze: It might take a little longer to get the cash you’re looking for with this option because of appraisals. And don’t forget to consider the costs of a refi, including closing, appraisals, and origination fees.

(Find out if refinancing your mortgage is the right move for you.) 

Home Equity Loan (HEL)/Home Equity Line of Credit (HELOC)

Home equity loans and credit lines can provide capital to pay for improvements on your abode. A home equity loan is a second mortgage on your house. The interest rate is fixed (and may be deductible) and you get the total loan amount as a lump sum up front. “You will need to know exactly how much your home renovation will cost in order to know how much you need to borrow,” says Kapfidze. 

A home equity line of credit (HELOC) provides a source of money —  a credit line — that you can draw from. You pay interest only on the amount you use. Unlike a HEL, the interest rate on a HELOC is variable which can make budgeting for payments a bit tricky. 

HerMoney need-to-know: Here again, be aware that using your house as collateral for a loan is a risk. Also HELs and HELOCs have pretty stringent equity requirements in order to qualify, Kapfidze says. A high credit score is also a must-have for loan approval. 

(Upgrade your credit reputation with these four easy hacks to improve your credit score.)

Taking Out A Personal Loan

A personal loan from a bank, credit union or online lender requires no collateral and can put cash in your hands pretty quickly. The interest rate you pay is based on your credit history and can range from 7% at the low end up to 30% or higher. 

HerMoney need-to-know: Because interest rates are higher than those on HELs and HELOCs, personal loans are most appropriate for borrowers financing smaller projects, Kapfidze says. Loan terms and fees vary dramatically, so shopping around is essential. it definitely pays to shop around.

LOAN SEARCH: Compare personal loan offers powered by our partner Fiona.

Using a Credit Card

Some credit cards have a reputation for charging punishingly high interest rates if you carry a balance. But play your cards right, and putting your renovation on plastic can make financial sense. 

Many cards come with special financing offers that allow you to avoid paying interest for a year or more, says Matt Schulz Chief Industry Analyst at CompareCards by LendingTree. 

HerMoney need-to-know: If you don’t think you’ll be able to pay for your purchases in full during the 0% promotional interest rate period, you probably should look elsewhere for financing, Schulz says. These special financing offers typically come with deferred interest clauses. “If you don’t pay every single penny of that balance during the introductory window, you’ll get hit with a bill for all the interest that would have accrued during that time, all the way back to the purchase date,” he says. That debt can be a really unpleasant surprise.

The Very Best Way Is Still Cold, Hard Cash

This may be a tough pill to swallow, especially when you’re pining for that Instagram-worthy, open concept dining and living space. But if you can’t afford to pay cash for the home renovation, maybe you shouldn’t do it, says Schulz. 

“It may take some time and persistence, but if you can save up the cash over a period of time, this is far better than going into debt,” Schultz says. “Yes, it would be great to have an HGTV showcase home, but not at all worth it if you have to go into years of debilitating debt to get it.” 

That certainly doesn’t mean you should put it off forever, but even delaying the project six months to a year can give you the time to save up money to put toward the project. And if you’re not planning to sell anytime soon, you can take all the time you need. 

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