Let’s talk about your borrowing options
Paying cash for home improvements is great but there may be low-cost borrowing options available too, if you need them.
1. Home equity loan
A home equity loan lets you borrow against the equity in your home.
Pros: Interest may be tax-deductible when used for home improvements—interest on up to $750,000 of mortgage and home equity debt, combined, may be deductible for married taxpayers filing jointly1
- Because the loan is secured by your home, interest rates are lower than those on unsecured loans
Cons: Because the loan is secured by your home, falling behind on payments could lead to foreclosure in a worst-case scenario
2. Home equity line 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: Interest may be tax-deductible when used for home improvements—interest on up to $750,000 of mortgage and home equity debt, combined, may be deductible for married taxpayers filing jointly2
- Typically, HELOCs offer lower interest rates than unsecured loans
- Flexible and convenient
Cons: 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 refinance
Refinancing your mortgage allows you to take money out of home equity and start over with a new loan.
Pros: Depending on your original loan terms, you may get a lower interest rate on your new loan if you refinance for a shorter period of time or if prevailing interest rates are low
Cons: You do have to go through the mortgage process again which can include an appraisal and loan fees
- The cost of a new mortgage may negate 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 loan3
The 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 the home must have been occupied for at least 90 days.
Pros: May be able to borrow up to $7,500 unsecured by the home
- There is no credit score or income requirement for loan approval
Cons: The FHA mortgage insurance premium will be included in the cost of the loan
- May need to verify that the loan proceeds were used for home improvement
- The loan limit is $25,000
5. Credit card
Credit cards offer an unsecured line of credit. Your credit limit and the interest rate are based on your credit score.
Pros: 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: Very high interest rate 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: Fixed interest rate so you always know what your payment will be
Cons: May be fees associated with applying and taking out the loan
- Interest rates on unsecured loans tend to be higher than those on secured loans