How to Finance Your Home Renovation

Are you purchasing a fixer-upper or looking to remodel your current home? Paying for your additions is certainly a top concern, but there are several steps you’ll need to take before you can figure that part out.

Once you’ve figured out whether you can afford the house itself, then it’s time to explore what you can do to improve it. It’s not a simple process, but it shouldn’t be intimidating, either. Here are a few tips to help you get started.

Set Renovation Goals

Setting goals for your reno is the first step in figuring out how to pay for it. Start with the must-do repairs first, then move on to the rest. Keep in mind, different loans will cover different types of work. For example, 203(k) loans won't cover a pool installation, but they will cover appliances.

You’ll also want to decide what kind of renovations you want. Do you want to go green? For example, if you’re looking to achieve net-zero energy, you'll likely want to budget for the two most effective upgrades: solar panels and window replacements. You may be able to get grants for solar panels or tax rebates for other eco-friendly improvements.

Estimate Your Costs

Once you’ve identified what projects you’d like to undertake, start looking at costs. As you do, you may decide to shift your priorities a little. In most cases, there will be some projects you’ll decide to tackle right away and others that can wait.

Online resources can help you find ballpark figures on how much some of your projects will cost. For example, if you need a new driveway, you can calculate your approximate cost with an online gravel calculator. You just need to know the length, width, and depth of the area.

Of course, labor and materials costs vary depending on where you live, availability of resources, and even the time of year. Once you know which projects are priority, you’ll want to contact a professional contractor to do an estimate.

Find Financing

There are a number of options at your disposal to pay for your renovation. If you have significant savings, of course, you can tap into that. Then, there are loan options.

If you’ve already taken out a mortgage, that ship has sailed: You can’t ask your lender to increase the amount. What you can do, though, is consider a cash-out refinance, which involves taking out a larger loan to pay off your previous mortgage — and leave you with money for your renovations.

In order to qualify for a larger loan, however, you may have to be in better financial shape than you were when you took out your initial mortgage. Part of that means having better credit.

If you plan to go this route, start building your credit well beforehand. You can do this by checking your credit report, then resolving any past-due payments, disputing any false charges, and making your payments on time. Check your credit mix and avoid applying for any other loans in the period leading up to your application.

Another option is a home equity line of credit, which you can tap at any time, like a credit card. Similar, but with some key differences, is a home equity loan or second mortgage, which allows you to borrow against the equity you’ve built up in your home. In order to calculate what you may qualify for, you’ll need to find out your home’s appraised value, which you can use to calculate your combined loan-to-value ratio.

If you’re buying a home that needs work, government-backed loan programs are also available. An FHA 203(k) loan, for example, allows for financing the purchase price of the home and the cost of the renovation, up to a certain percentage.

Get Expert Help

You can always use an online calculator to determine what your monthly payment will be based on factors like interest rate and loan amount, but eventually you will need an expert lender to help you navigate financing your renovation.

Look at online reviews, solicit recommendations from friends and family, and check out several options before you decide. After all, financing a renovation is one of the biggest financial decisions you’ll ever make.