Many things about home renovation are flexible. You can always change wall colors or nudge a wall another six inches. But one thing is certain: you need money. Not a single nail gets hammered or PEX line laid or wire run or foundation poured without money.
Here are the most popular ways of funding your home remodel, from the most desirable to least desirable.
Cash and Liquid Assets
The most readily available money you can have: savings, checking, CDs and savings bonds near maturity. Cash is absolutely the cleanest, freest way to pay for your project, as you are not beholden to a lender.
No interest, no fees, no charges.
You are not dependent on anyone else.
Funding speed is instantaneous; no need to wait on anyone to liquidate these funds.
Depletes any reserves you may have.
Most people do not have a lot of cash available for larger projects, such as additions and full-room remodeling.
Bottom Line: Cash and liquid assets are the best way to fund your projects—but only if you have plenty to spare. Some retirement accounts allow you to borrow a certain percentage against them.
Got any willing friends and family? For the price of a six-pack and a takeout pizza, they may help you put some sweat equity into your renovation project.
Labor is completely free.
Satisfying to have 100% control of your project.
Only the labor is free; you still have to pay for materials.
If a learning curve is involved, it still may be cheaper and faster to hire workers.
Bottom Line: Some sweat equity is inevitable, and even can be fun, but do not stretch it if you are not sure of your abilities.
Zero-Interest Home Remodeling Loans
Home Improvement Program (or "HIP") loans from your county are not exactly free renovation loans, but they do come close. Counties and other municipalities will subsidize some or all of the interest on your remodeling loan in order to help preserve local housing stock.
In one scenario involving a five-year, $50,000 8% loan that is subsidized 3% through HIP, your total interest savings would be $4,215.
Essentially free money in the form of subsidized interest for your loan—subsidies which you do not have to repay.
Loans are typically capped at between $25,000 and $50,000.
Property taxes still must be paid by you, including the elevated taxes that come as a result of your home improvement.
Substantial red-tape associated with securing these subsidies, including monitoring of the project, time window for completion, and narrow definition of home-related projects (for example, swimming pools, hot tubs, decks, and other luxury-type items are not financed).
Bottom Line: HIPs are not for every homeowner. But if you qualify, it is an unbeatable deal.
Home Equity Loan or Line of Credit (HELOC)
A home equity loan is the classic way to finance home renovations. Take out a loan against the equity in your own house.
Lower interest rates than personal loans and credit cards.
Large amounts of money may be available for large projects like additions.
If you keep depleting your equity, you reduce the sum you will receive when you eventually sell the house.
The large amounts available with this loan encourage spending on things unrelated to the renovation.
Bottom Line: Target this loan only for large projects, such as additions, pools, driveways, and siding.
A credit card that you pay off at the end of each month. Or a zero-interest that you don't have to pay off for six months or a year. Some homeowners pay off one zero-interest card with yet another zero-interest card, thereby creating a permanent, but risky, no-interest loan.
Money available quickly.
Lucrative points or rewards possible on some cards by charging large home-related purchases.
Danger of high interest and fees.
Give you false sense of security that you have more money than you actually have.
Bottom Line: A tricky way to finance home renovations, and one that requires attention and maintenance.