Remodeling your kitchen may cost more than a new car. But the bright side is that, depending on the project, investing in your home could actually help increase its value.
While paying with cash for home improvement projects would be ideal, it’s not always possible. You do have options when it comes to financing, though, including home equity, refinancing, an FHA home improvement loan, a credit card, or a personal loan. They all come with some pros and cons that are important to consider.
Before borrowing money for a home improvement project, ask yourself a couple of questions: Does the potential increase in home value—and your increased enjoyment from the improvements—justify the cost? And do you have the financial ability to repay any money you’ve borrowed?
Here are some types of home improvement loans to help pay for renovation and remodeling projects, along with their pros and cons.
1. Home equity loans
A home equity loan lets you borrow against the equity in your home.
Pros of home equity loans
- Interest may be tax-deductible when used for home improvements. The deduction limit depends on your filing status and what year the loan was secured1
- Because your home secures the loan, interest rates are usually lower than those on unsecured loans
Cons of home equity loans
- Because your home secures the loan, falling behind on payments could lead to foreclosure in a worst-case scenario
2. Home equity lines of credit
A home equity line of credit (HELOC) is an open line of credit you can use at any time, for a set number of years, to borrow against home equity.
Pros of home equity lines of credit
- Interest may be tax-deductible when used for home improvements. The deduction limit depends on your filing status and what year the loan was secured1
- Usually, HELOCs offer lower interest rates than unsecured loans
- Flexible and convenient
Cons of home equity lines of credit
- They may have variable interest rates—which means payments could increase if interest rates go up
- Falling behind on payments could put your home at risk
3. Cash-out refinances
Refinancing your mortgage allows you to take money out of home equity and start over with a new home loan.
Pros of a cash-out refinance
- Depending on your original loan terms, you may get a lower interest rate if you refinance for a shorter period of time or if prevailing interest rates are low
Cons of a cash-out refinance
- You have to go through the mortgage process again, which can include an appraisal and loan fees
- The cost of a new mortgage may outweigh the potential advantage of using home equity instead of borrowing
- You could end up with less favorable terms than your original loan
4. FHA home improvement loans
The Federal Housing Authority (FHA)-insured Title 1 Home Improvement Loan can help homeowners without a lot of equity make their home more useful and livable. For a single-family home, you may be able to borrow up to $25,000 for as long as 20 years. You must own the home, and you must have occupied the home for at least 90 days.2
Pros of FHA home improvement loans
- You may be able to borrow up to $7,500 unsecured by the home2
- There’s no credit score or income requirement for loan approval
Cons of FHA home improvement loans
- The FHA mortgage insurance premium will be included in the cost of the loan
- You may need to verify that the loan proceeds were used for home improvement
- The loan limit is $25,0002
5. Credit cards
Credit cards offer an unsecured line of credit. Your credit limit and the interest rate are based on your credit score.
Pros of credit cards
- Convenient and flexible
- Promotional interest rate offers can make the cost of borrowing low
- Credit card rewards can pay you back when you spend
Cons of credit cards
- Your interest rate will likely be very high if you carry a balance from month to month without using a promotional offer
- Credit cards nearly always have a variable interest rate, so if interest rates go up, your rate can go up too
6. Personal loans
A personal loan is a fixed-rate, unsecured loan.
Pros of personal loans
- You’ll have a fixed interest rate, so you always know what your payment will be
Cons of personal loans
- There may be fees on applying for and taking out the loan
- Interest rates on unsecured loans tend to be higher than those on secured loans