Top 5 Ways to Borrow Money for Home Renovations

Home renovations can enhance your living space, boost property value, and make your home more comfortable and energy-efficient. However, funding these projects requires building savings and borrowing money, especially for larger remodels or upgrades.

Fortunately, several financing options are available, each suited to different needs and financial situations. Here are the top five ways to borrow money for home renovations to help you choose the best fit for your project and budget.

Understanding Your Options

When considering financing your home renovation, explore the various borrowing options. Each method has advantages, interest rates, and repayment terms, so finding the one that aligns with your needs can save you money and stress in the long run.

Assessing Your Financial Situation

Before committing to a loan, review your overall financial health. Begin by evaluating your savings, income, and current expenses to determine how much you can contribute to the renovation and how much you need to borrow. Consider your existing debt obligations, as adding new debt could strain your budget. Lenders will also assess your debt-to-income ratio, so maintaining it within a healthy range can improve your chances of securing favorable loan terms.

Your credit score is another key factor, as it directly impacts your bank loan approval chances and the interest rate you receive. A higher score can lead to lower interest rates and reduce the overall cost of the loan. However, you may not get a personal loan with bad credit or receive a higher interest rate.

If your credit needs improvement, it may be worth boosting it before applying for financing. Understanding your financial situation will help you make a more informed borrowing decision and avoid overextending yourself.

Home Equity Financing

Home equity financing allows you to borrow money against the value of your home, making it a popular option for homeowners looking to fund major renovations. With your home as collateral, this type of financing typically offers lower interest rates than unsecured loans. A home equity loan and a home equity line of credit (HELOC) are two primary types of Canadian loans for home equity financing.

Home Equity Loan

A home equity loan provides a lump sum based on the equity built up in your home. It comes with a fixed interest rate and set repayment terms, which makes budgeting for monthly payments easier. This option is ideal for large projects with predictable costs, as it offers stability and allows you to pay for the renovation over time with consistent payments.

Home Equity Line of Credit

A HELOC works more like a credit card, giving you a revolving line of credit based on your home’s equity. Unlike a home equity loan, a HELOC offers variable interest rates and the flexibility to borrow and repay as needed during the draw period. It is a great option for ongoing projects or renovations where costs may fluctuate, as you can access funds when required and only pay interest on the amount borrowed.

Alternative Financing Options

If home equity financing isn’t the best fit for your situation, there are other home renovation financing options. Personal loans and government assistance programs can provide accessible alternatives, each with unique benefits depending on your financial needs and the project scope.

Personal Loan

A personal loan is an unsecured loan without collateral, such as your home, to secure the funds. It offers a lump sum with a fixed interest rate and set repayment schedule, making it a predictable option for financing renovations. You can also use a personal loan to help build credit to strengthen your credit profile.

While there are risks for personal loans, like higher interest rates than home equity loans, they may be easier to obtain if you don't have sufficient equity in your home. It's best for smaller or mid-sized projects with clear costs.

Government Assistance Programs

Many government programs offer financial assistance for home improvements, especially for energy-efficient upgrades or essential repairs. Programs like the Canada Greener Homes Grant or provincial renovation rebates can provide grants, low-interest loans, or tax credits to help offset the cost of specific renovations.

These programs can be an excellent option for homeowners looking to reduce their renovation costs while improving their home’s sustainability and energy efficiency. Be sure to research available options and eligibility criteria for your region.

Refinancing and Cash-Out Options

For homeowners looking to tap into their home’s value without taking out a separate loan, refinancing and cash-out options can provide a flexible way to finance renovations.

These methods offer competitive interest rates and long-term repayment options by adjusting your existing mortgage or accessing equity, making them appealing for larger projects.

Cash-Out Refinancing

Cash-out refinancing allows you to replace your current mortgage with a new one with a higher loan amount, giving you access to the difference in cash. You're borrowing more than you currently owe on your home, and you can use the extra funds available for your renovation. This option can be beneficial if current mortgage rates are lower than your original loan, as you may secure a lower interest rate while gaining the capital needed for your project.

However, it's important to factor in closing costs and the potential for a longer repayment period. Cash-out refinancing is best suited for major renovations that require a significant investment.

Budgeting and Planning

Before committing to any financing option, have a solid budget and a clear plan in place for your home renovation. You can use different budgeting guides, like the 30-day savings rule, to help. Estimating the total cost of your project, from materials to labor, will help you determine how much you need to borrow and avoid surprises down the road. Careful budgeting also ensures you choose the financing option that best suits your financial situation and renovation needs.

Estimating Renovation Costs

Start by getting detailed estimates from contractors or suppliers, breaking down costs into categories like materials, labor, permits, and unexpected expenses. Ensure to include a buffer for unanticipated costs during the project.

This estimate will give you a clearer idea of the amount you need to borrow and help prevent overspending. Accurate cost estimates are essential to aligning your renovation goals with your budget and choosing a suitable loan option.

Home Equity Loans vs. Other Options

When deciding between a home equity loan and other financing options like personal loans or refinancing, consider the short-term and long-term impact on your finances. Home equity loans usually offer lower interest rates and tax-deductible interest, but they use your home as collateral.

In contrast, personal loans might have higher rates but don’t require collateral, making them less risky if you're concerned about putting your home on the line. Cash-out refinancing and government programs are also worth considering, depending on your specific needs and eligibility. Comparing these options carefully ensures you select the best approach for funding your renovation while staying within your financial comfort zone.

Manage Your Money Wisely and Build Your Dream Home With Help From KOHO

Preparing for a home renovation requires careful financial planning, and KOHO offers a range of tools to help you manage your money wisely. By using KOHO’s spending and saving accounts, you can easily budget for your renovation while earning interest on your savings through their high-interest savings account.

When it comes to paying for your home improvement project, KOHO’s virtual credit card provides a secure and convenient way to cover costs while also helping you build your credit. Strengthening your credit profile can improve your chances of securing favorable loan terms for larger projects, and with KOHO, you can monitor your progress by accessing your free credit score.

If your renovation budget runs over, KOHO’s overdraft coverage offers an extra safety net, giving you peace of mind as you work toward building your dream home.