How to finance a home remodel

This is not a loan offer and not tax advice. Lenders set their own terms. This page does not say whether interest is deductible.

How you pay for a remodel is a separate decision from what the remodel costs. Price the job first, including a contingency for work nobody can see yet. That split is in how much contingency to set aside. Then decide whether the money is savings, a loan secured by the house, or a loan that is not. The papers from the lender control the rate, the fees, and what happens if you fall behind. This page names the common types. It does not quote a rate.

Cash you already have

Paying from savings means you are not adding a loan. It does not mean you should pay the contractor the full price up front, or in cash with no receipt. The Federal Trade Commission lists "pay for everything up front or only accept cash" as a scam sign (FTC). How to pay, and what to keep, is in cash, Zelle, or card. The deposit limits some states set are in deposits and payment schedules.

Borrowing against the house

The Consumer Financial Protection Bureau describes two products that both borrow against the equity in your home. If you already have a mortgage, the Bureau says both would be second mortgages that you pay in addition to the first (CFPB).

• A home equity loan is a specific amount, paid to you in a lump sum. The Bureau says the rate may be fixed or adjustable. You typically repay it in regular monthly payments, and repayment is often required when you sell.
• A HELOC is a line of credit. You can draw more than once, up to a maximum, and payments replenish the available credit, similar to a card. The Bureau says HELOCs usually have adjustable rates, and the payment varies with the balance.
• A cash-out refinance replaces your existing mortgage with a bigger one, and you take the difference in cash. The Bureau says you often pay closing costs, and that you should compare the new rate with the rate on your current mortgage. Depending on the terms, it may cost more or less than a HELOC (CFPB, similar loans).

The Bureau says a HELOC comes with risks and fees. If you are already having trouble paying your mortgage, it says to talk with a housing counselor before you take a home equity loan or a HELOC. The Bureau's page tells you how to reach a HUD-approved counselor. Read the lender's papers for the draw period, the fees, and what is due if you sell.

A loan that does not use the house

The same CFPB page describes a personal line of credit, which borrows against your credit rather than the house. It says credit limits may be lower, and interest rates may be higher, than options that use the home as collateral. A credit card lets you borrow up to the card's limit. The Bureau says some promotions offer a lower rate for a set number of months, and that regular card rates are typically higher than options secured by the home. Ask the lender for the cost over the whole term, not only the first month. This page does not compare those costs for you.

An FHA 203(k)

The Federal Housing Administration's 203(k) program lets a borrower finance rehabilitation or repair in a single FHA-insured mortgage used to purchase or refinance a home. HUD describes two versions. Standard 203(k) is for substantial remodeling and repairs. Limited 203(k) is for minor, nonstructural repairs (HUD, July 9, 2024).

HUD's 203(k) basics page says a Standard case requires a 203(k) consultant and is for repairs with a minimum cost of $5,000, and that a Limited case does not require a consultant, has no minimum repair cost, and cannot exceed $75,000 in repair cost. The July 2024 release says the Limited cap rose from $35,000 to $75,000 and is reviewed annually, and that the rehabilitation period is 12 months for Standard and nine months for Limited. Those figures are HUD's, and the basics page points to HUD Handbook 4000.1 for the details. Confirm the current rules with an FHA-approved lender before you rely on them. The program is not a promise about the rate.

Financing the contractor offers

A contractor may offer to arrange the loan. Treat that as a second contract. The Texas Attorney General says to shop financing separately from the bids on the work, and to look at the interest, the finance charges, and the payout terms, including the cost over the whole term. The AG also warns that some contractors have a homeowner sign a credit contract and then sell the right to collect for less than the contract price, which the AG says usually means the work could have cost less if you had paid cash or arranged the financing yourself (Texas AG). Read the credit papers on their own. The FTC lists steering you to a lender as a reason to slow down.

Whatever you choose, keep the invoices and the proof of payment with the project. What the IRS says about the cost of the work and your home's basis is a different question, in home improvement cost basis.

RenoBinder keeps the budget and the payments in one project. It does not lend money. One room is free.

This is general information, not legal advice. Rules vary by state; for a dispute, talk to a licensed attorney or your state contractor board.

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