Whether you’re remodeling a bathroom, updating the kitchen, or replacing the roof, the right home renovation project can increase your property value and make the home more livable.
However, you may not want to drain your savings on a $25,000 home renovation project—or you may not even have enough in savings to cover half the cost. Fortunately, there are several other ways to finance your reno. These are the pros and cons of each financing option.
How Can I Finance a Home Renovation?
Depending on the home renovation, you may be able to finance it with cash from a savings account. However, if you don’t have the means to cover the cost, there may be other options. A few ways you may be able to pay for your home renovation include:
- Credit cards
- Personal loans
- Home equity loans
- Home equity lines of credit (HELOC)
- Cash-out refinances
- Government loans
Credit cards are one financing option to consider when planning a $25,000 home renovation project. Most Americans already have at least one card. In 2020, there were 497 million credit card accounts in the U.S., an increase of 12 million new accounts from 2019, according to data from credit bureau Experian.
Credit cards are also generally easy to use. Ask your contractor or supplier if they accept credit cards as a form of payment if that’s how you hope to pay for the project. If they don’t accept credit cards, you may want to find a different company to work with. Credit cards are also usually easy to apply for, and you may be able to use more than one credit card to pay for the work.
“You can spread the cost out over several cards if you have them, or apply for a new credit card at a very low introductory rate,” Melissa Cohn, executive mortgage banker at William Raveis Mortgage, told The Balance in an email.
The average credit card interest rate as of March 2021 was 20.28%, according to data collected by The Balance. If you can get a card with a lower interest rate (some may even have 0% interest for a certain period of time), this could be a good option for financing a $25,000 home renovation.
Be mindful of how you’ll pay off the credit card so you don’t get yourself into unnecessary debt, as well as how opening a new card could impact your credit score. Maxing out your credit card to pay for the renovation may also push your credit utilization ratio to an unhealthy level.
If you do qualify for a low introductory interest rate, but don’t pay off the entire balance before the higher rate kicks in, you could end up paying a lot more than expected compared to other forms of financing. For example, if you put the entire $25,000 on a credit card with an 18% annual percentage rate (APR) and pay $1,000 a month toward the balance, it would take you two years and eight months to pay it off completely. You would end up paying $6,567.99 in interest, and that’s not deductible on your taxes.
It’s generally smart to be careful when using credit cards to pay for this large of a project. You may be able to qualify for financing options that have much lower interest rates, such as those below.
One alternative to paying for home improvements with credit cards is to get a personal loan. You can usually get a personal loan with a significantly lower interest rate than you would have on your credit card. Plus, personal loans for home improvements can usually be obtained quickly and have long terms—some as long as 12 years. In addition, an online lender usually can make the process convenient.
Like with any loan or line of credit, the interest rate will depend on your credit score. And if it’s not good (usually a FICO score of 670 or higher), the rate you qualify for may be high. In addition, because you are expected to pay the loan back in a specific timeframe, your monthly payments could be larger than if you used a credit card, which does not require you to pay off the balance by a certain date. And like credit cards, interest paid on personal loans is not deductible on your tax returns.
While some companies do not charge fees on personal loans, other lenders do. These fees may include prepayment penalties, late payment fees, or origination fees and could end up eating into your budget for your home renovation.
Home Equity Loan or Home Equity Line of Credit (HELOC)
There are several advantages to taking out a home equity loan or home equity line of credit (HELOC) to finance a $25,000 home renovation. They often have lower interest rates, which make borrowing money for a home improvement project more affordable, according to Cohn.
Home equity loans offer you a lump sum, fixed payments, and a set repayment term, while a HELOC may have a variable interest rate and repeated borrowing is allowed. With both options, you can usually borrow up to 85% of your home’s value, too, minus the balance you owe on your mortgage. HELOCs tend to have a 10-year interest-only period, which Cohn said may help make monthly payments initially very low.
If you’re approved for a HELOC for up to $25,000, you can draw from that line of credit whenever you need to. For example, initially, you may only need $2,000 to give the contractor for the down payment. After that, it may turn out you don’t actually need the full $25,000. If the total project came to $20,000, for example, you won’t have to pay back anything more than that—or any associated interest on the remaining line of credit.
The IRS allows you to deduct interest paid on some home equity loans and HELOCs.
The ability to qualify for a home equity loan or HELOC is based on having sufficient equity in your home, so new homeowners who recently bought a fixer-upper may not be able to use one of these finance options.
“You will need to pay for fees to secure [a home equity loan], because generally, an appraisal is necessary, among other processing steps and fees,” Elizabeth Dodson, co-founder of HomeZada, told The Balance by email. Some of the other fees may include an application fee and closing costs. And because it’s the same process as getting a regular mortgage, it may also take some time to get approved.
“[A home equity] loan is tied to your home as collateral, so if you do not pay it, a lien can be placed on your home until it is paid,” Dodson said. Because these options use your home as collateral, there is a risk of foreclosure if you fall behind on payments or do not pay back the money.
A cash-out refinance is another option for taking advantage of the equity in your home if you need money to pay for renovations. For example, say you have $150,000 left to pay on your mortgage and now you want to complete a $25,000 home renovation project. With a cash-out refinance, you may be able to get a lump-sum of $25,000 after qualifying for a new mortgage worth $175,000 (the remaining $150,000 mortgage balance plus the $25,000 renovation amount).
“It can kill two birds with one stone if you have a high interest rate on your mortgage and can refinance into a much lower rate,” Justin Goldman, co-founder and CEO at RenoFi in Philadelphia, said in an email interview.
Even after you factor in closing costs—typically 3% to 5%—it may be a good option if it allows you to get a new interest rate and a new loan term. While another 30-year fixed mortgage loan term may not be ideal, your monthly payments may be lower and more affordable than before.
Just as with a home equity loan or HELOC, if you don’t have much equity in your home, a cash-out refinance may still not offer enough money to help you pay for your home renovations.
There are a few federal government loan programs that you may qualify for to complete a home renovation project. Some even offer incentive programs for energy efficient upgrades.
“These types of projects and the loans that support them will also ultimately reduce your energy consumption and thus, your bills,” Dodson said.
The Fannie Mae HomeStyle Energy Mortgage is one example. It covers weatherization (achieved through items like insulation, new windows, and upgraded doors); natural disaster readiness (like retaining walls or storm-surge barriers); and alternative energy sources (like solar panels). Another option is the Department of Energy’s Weatherization Assistance Program for low-income households.
As other possibilities go, veterans may qualify for a VA home loan, while members of a federally recognized American Indian tribe or Alaska Natives may apply for the Housing Improvement Program, administered by the Bureau of Indian Affairs (BIA).
Other government loans you may be able to qualify for include:
- Fannie Mae HomeStyle Renovation Mortgage
- Title I Property Improvements Loan
- 203(k) Rehab Mortgage Insurance
State and local governments may also offer home renovation loans that you can apply for.
Goldman said that government loans offer a lot more borrowing power. “They factor in the value of your home after the renovation, rather than the current value,” he said. “The main draw to these loans is that they often allow homeowners to borrow…more than a home equity loan or HELOC.”
However, the process of applying for one of these loans may be both complicated and time-consuming since they often require additional steps, come with higher closing costs and interest rates, and more.
“It requires hiring a HUD consultant to inspect the construction progress—and you’ll get your money in installments, called 'draws,' rather than all at once, as the construction progresses,” Goldman said, adding that you may have to refinance the property to qualify for the loan, too.
Some contractors may not take on projects financed through government loans because of the involved inspection process, according to Goldman, so keep that in mind if you have a contractor you’d like to work with.
The Bottom Line
A $25,000 home renovation project is no small task. Not only is it a large financial investment, it’s also likely a significant time commitment. Depending on your financial situation, consider all of your financing options for your home improvements before selecting the right one. Consider the interest rate on the card or loan, how long it will take to pay back money borrowed or charged, and whether you can afford the additional fees and steps that are involved. From cash in your savings account, to credit cards, personal loans or a cash-out refinance, you may be able to use one or several of these options to pay for your $25,000 home renovation.