Recently decide to renovate your home but not sure how to pay for the home improvements? Whether you're doing seasonal upkeep or preparing to sell your property, home improvement projects can cost serious money that you might not have lying around. From traditional methods like using cash or credit cards to more unconventional options like tapping into equity for home remodels, here are eight ways to finance home improvements.

• Cash
• Cash-Out Refinance
• Credit Card
• Government Loan
• Home Equity Line of Credit
• Home Equity Loan
• Home Improvement Loan
• Unison’s Equity Sharing Home Loan

Cash

One of the most common ways to fund home improvements is by saving up cash. Due to the lack of interest payments and closing costs, saving is also one of the least expensive home renovation financing options. However, building up enough cash to complete all the projects around your house can be difficult if you're limited on time.

It’s generally recommended to save 1% to 4% of your home's value for maintenance and repairs that come up, although major renovations might require additional savings. Then, with every project, set a realistic budget. If you lack the funds for a complete overhaul, prioritize only making essential repairs. Similarly, it's best to focus on improving one room at a time to avoid going over budget.

So, should you pay cash for home improvements? Consider these pros and cons of saving money for home improvements.

Pros	Cons
Less Costly: Cash does not accrue interest or debt and is generally a less expensive payment solution.	Depleted Savings: Overextending on your home improvement project can cause financial issues if emergencies that aren’t budgeted for arise.
No Impact on Credit: Saving up money to pay with cash will not negatively impact your credit score.	Delayed Start: Paying with cash requires you to wait to start renovations until after you’ve saved up the necessary amount.
Simple Payment: Using cash for home improvements is straightforward and prevents adding the burden of additional monthly payments.	Limited Flexibility: If unexpected issues come up or a project’s scale increases, you may not have sufficient funds to cover additional expenses.

Cash-Out Refinance

Cash-out refinancing is a low-stress refinancing strategy in which homeowners convert home equity into cash by replacing their existing mortgage with a new, larger one. The difference between these two mortgage amounts can then be "cashed out" through a lump sum payment to help you finance home improvements.

Cash-out refis are repaid through monthly payments and are ideal for homeowners who expect to live in their homes for a long time. Although requirements can vary by lender, receiving approval for a cash-out refinance typically requires a good credit score, a stable source of income, and roughly at least 20% equity in your home.

To determine if this option is best for you, review the following cash-out refinancing pros and cons.

Pros	Cons
Larger, Immediate Funds: Homeowners receive a lump sum (up to 80% of your home’s value) which can immediately be put toward home improvements.	Decreased Home Equity: Replacing your previous mortgage with a new one eliminates the equity you’ve built up in your home.
Lower Interest Rates: Interest rates for mortgages are typically lower than other forms of borrowing.	Higher Debt: Cash-out refis are affected by market fluctuations and may lead to increased monthly mortgage payments and higher overall debt.

Credit Card

When used in appropriate circumstances, credit cards can be an effective, low-cost method of paying for home renovations. Since balances must be paid off regularly, credit cards are best to use for minor repairs, cosmetic updates, minimal maintenance tasks, and other small improvements that you can easily pay off over time. This home repair finance option is also preferable for urgent projects that demand quick access to cash, but aren't substantial enough to warrant larger home repair loans.

Most credit card companies require you to have a good/excellent credit score. To choose the best credit card for home improvements, look for favorable terms like low or 0% APR, no annual fees, and cash-back rewards.

Here are some of the benefits and drawbacks of using credit cards to afford home renovations.

Pros	Cons
Minimal Qualification Requirements: Besides creditworthiness, credit cards are generally easier to qualify for compared to some loans for home renovations.	Impact on Credit Score: If you do not make minimum monthly payments, you’ll see a negative impact to your credit score.
No Collateral Required: Unlike home remodeling loans that use your house as collateral, credit cards do not put your assets at risk.	Credit Limits Credit cards come with a maximum charge limit and may not be able to support large home renovations.
Rewards Points: Some credit cards offer cash-back rewards for home improvement purchases.	High Interest Rates: After the introductory period ends, standard credit card rates can be significant and leads to increased debt if not properly managed.

Government Loan

The federal government provides many house renovation loans, including Title I Loans and FHA 203k rehab loans.

Title I Loans are offered by the Federal Housing Administration (FHA) to help homeowners pay for necessary home improvements and repairs. This home improvement financing option is great for individuals who don't meet the credit or equity requirements to secure other types of loans.

FHA 203k rehab loans, on the other hand, help you buy a property that requires substantial repairs. These mortgages are insured by the FHA and allow you to work with an approved contractor to renovate parts of the property, make extensive structural repairs, or eliminate safety hazards.

Although those with poorer credit scores are eligible for Title I loans, they often still require you to have a decent debt-to-income ratio, as well as proof that you make enough money to cover the proposed payments. Qualifying for FHA 203k loans usually requires a good credit score and a 3.5% down payment.

Taking out a loan for home improvements comes with several advantages and disadvantages. These are the main ones.

Pros	Cons
Fixed Interest Rates: Many government-backed home renovation loans come with fixed interest rates, so you can expect consistency to more easily budget for monthly payments.	Limited Loan Amounts: Limits for FHA loans are lower than other forms of borrowing and may not be able to cover costly renovations.
Lower Interest Rates: Government home repair loans typically come with more competitive interest rates as opposed to traditional loans.	Insurance Premiums: Many FHA loans come with upfront mortgage insurance costs, which add to the overall loan expenses.
Less Strict Requirements: With no equity requirement and more flexible credit requirements, government loans may be more accessible for you.	Long Processing: Government loans can require more paperwork and longer processing times for closing compared to other types of loans.

Home Equity Line of Credit

A home equity line of credit (HELOC) loan is a revolving line of credit with a process much like a credit card. HELOCs work by using your home as collateral, allowing you to unlock your home's equity up to a certain credit limit in order to finance major home projects. Funds can be accessed on an as-needed basis via credit cards, electronic transfer, and/or checks.

Once you've used up the allotted funds, you'll enter a repayment process to pay off the principal and accrued interest through monthly installments. The specific amount you can borrow through a HELOC depends on your credit score, income, and the amount of equity you own in your home.

Check out the pros and cons of home equity lines of credit to see if this option aligns with your goals.

Pros	Cons
Draw Period: During the draw period, the homeowner typically only needs to make interest-only monthly payments on the funds they access.	Risk of Overspending: The temptation to overspend on large home improvements can result in substantial debt.
Flexible Access to Cash: You can access your HELOC funds through many means and there are few limits on how and when you can use them.	Variable Rates: Many HELOCs have variable, rather than fixed interest rates, which can lead to unpredictability and difficulty budgeting.

Home Equity Loan

Home equity loans, also known as closed end second mortgages, involve a homeowner borrowing against the equity built up in their home. Unlike other home renovation financing options, home equity loans provide a single lump sum payment with stable monthly repayment rates, ideal for large renovation projects that require a significant amount of cash on short notice.

Qualifying for a home equity loan requires a strong credit score, a consistent source of income, a good debt-to-income ratio, and owning 15% to 20% equity in your home.

Learn more about the main advantages and disadvantages of home equity loans if you're still on the fence about how to pay for a home remodel.

Pros	Cons
Immediate Lump Sum: Borrowers receive a single lump sum to pay for urgent home renovation costs.	Additional Mortgage: Home equity loans are a second mortgage payment, which can increase financial stress on homeowners who are already struggling.
Low, Fixed Interest Rates: Regardless of market conditions, home equity loans offer a fixed interest rate that’s often lower than other forms of borrowing like credit cards.	Equity Loss: A drop in the real estate market may lead to diminished equity or even negative equity with loans exceeding your property’s value.
Predictable Repayment: With set repayment periods, you’ll be able to appropriately budget for payments and have a clear idea of what you owe.	Risk of Foreclosure: There is a risk of foreclosure with a home equity loan in the case that you fail to make your mortgage payments.

Home Improvement Loan

As the name suggests, home improvement loans are personal loans that are specifically designed to help homeowners pay for home renovations, repairs, or remodels. Because they are unsecured, home repair loans might be the right choice for you if you prefer not to use assets, like your home, as collateral.

These loans for home renovations are generally paid back in fixed amounts every month for a few years. To get a home renovation loan, lenders will consider your creditworthiness. This home renovation funding solution also typically requires a proof of stable income and a low debt-to-income (DTI) ratio to qualify.

If you're wondering how to pay for home renovations without risking your house, turn to the pros and cons of home improvement loans.

Pros	Cons
No Collateral Required:Unsecured personal loans do not use assets like cars, homes, or savings accounts as collateral, putting you at less risk.	Higher Interest Rates: Without collateral to secure the loan, home improvement loans often have higher interest rates.
Fixed Interest Rates: Home improvement loans often come with fixed interest rates and more predictable payments.	Strict Requirements: Requirements to get approved for a home improvement loan tend to be stricter than secured loans.
Quick Funding: These loans typically have a quicker approval process, meaning you can gain access to funds more immediately.	Borrowing Limits: The amount of money you can access through home improvement loans is often lower than other forms of borrowing.

Unison’s Equity Sharing Home Loan

Unison’s Equity Sharing Home Loan is an interest-only, ten-year second mortgage, which innovatively combines aspects of a traditional home equity loan and Unison’s own equity sharing agreement and empowers homeowners to tap into their equity to make home improvements.

A shared appreciation component enables Unison to offer below-market rates*, which, with partially-deferred interest, adds up to low monthly payments for the homeowner! At the end of the loan, the homeowner pays back the principal, any deferred compounded interest, as well as a percentage of the home’s appreciation. Unison’s share in the home's future appreciation is fixed at the beginning of the origination process, and the amount is proportional to the amount of the Equity Sharing Home Loan–typically, 1.5x the percentage borrowed. For example, if you borrow 10% of your home’s current value, Unison will receive 15% of the future appreciation.

Unison welcomes homeowners with a FICO score of 680 and above, a maximum combined loan to value ratio of 70%, and a debt-to-income ratio not exceeding 40%.

Benefits of the Equity Sharing Home Loan

Below-Market Interest Rates for Second Mortgages: The shared appreciation component enables Unison to offer lower rates.
Low Monthly Payments: Enjoy flexibility with your monthly finances. You only pay up to 75 percent of your loan’s interest each month and defer the remaining 25 percent to the end of the loan.
Flexible Terms: There is no prepayment penalty if you decide to pay off sooner.
Hold on to Your Equity: Unison shares in a portion of the future appreciation of your home, not the equity you’ve already built.

Learn more about the Unison Equity Sharing Home Loan today to discover how you can put your home's equity to work on financing the home renovation of your dreams.




*Based on an internal analysis and review through July 2024 of interest rates for second-lien home equity loans.



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