9 Ways to Finance Your Next Home Improvement Project

With interest rates at historic lows, now is the ideal time to finance home improvements that will increase your home’s value and help you cut your monthly energy costs. However, financing a home improvement project can be a challenge, so it’s important to know your options and understand the costs involved so that you can make the best decision for your budget and your needs. That’s why we put together this list of tips to help homeowners navigate the process of choosing the best way to finance your next home improvement project.

Home Equity Line of Credit

A home equity line of credit (HELOC) is a loan against the value of your home. It’s a great way to finance home improvement projects, as you can borrow as you need it, and pay back the loan over time. HELOC are structured in two stages. First, there is a draw period typically lasting 10 years, where the loan funds are available. The second stage is the repayment stage. At this time, loan funds are inaccessible, and payments (both principal and interest) are required on a regular basis. Typically, HELOC will grant a 10-year draw period, followed by a 20-year repayment period.

One thing to watch out for if applying for a HELOC is the extra amount of money paid overall. Since the draw stage requires interest-only payments, a homeowner could end up paying double during the repayment stage when interest and principal payments are due. That said, HELOC only require repayment on loan funds that are used. Untouched funds are free from monthly interest payments.

Overall, home equity line of credit is best used when needing a loan that is going towards a purchase spanning over time. For home improvement projects, this is beneficial if multiple different projects are planned. Instead of having different loans for each project, a homeowner can take out a HELOC and use the loan to complete different projects, all funded by the same loan.

Cash-out Refinance

A cash-out refinance allows a homeowner to replace their current mortgage with a new one valued for more than the home is worth, paying out the difference to the homeowner in cash. It’s important to understand that to be deemed eligible for a cash-out refinance, the homeowners must have equity built up in the home. Interest rates typically are higher for cash-out refinances, but the benefit is a homeowner can get the funds required for a new home improvement job.

Homeowners also may not use all of their home’s equity. For example, if a house a valued at $300,000 and there is an equity principal of $150,000, the equity balance can be refinanced to $200,000 allowing the homeowner to receive $100,000 in cash upon closing on their house. Additionally, cash-out refinancing doesn’t add another monthly payment, which can allow the homeowner to free up money tied to home equity to use towards home improvement projects, or to invest (such as in a retirement account).

Construction Loan

A construction loan, also called a “self-build loan”, is a short-term loan designed to fund the building of a home or home addition project. Construction loans have higher interest rates tied to them, generally higher than the typical mortgage loan. Construction loans are short term (around 1 year) and once the construction finishes, the borrower can refinance the loan or take another loan to pay it off.

Sometimes, the lender will pay the construction company directly, as opposed to paying the homeowner first to then distributing the money to the builder. Homeowners who choose a construction loan also may only need to pay interest on the loan while the project is underway. This allows them to only make interest payments on the amounts they’ve taken out, rather than interest for the total amount of the loan.

Private Loan

Private loans can range from borrowing money from a relative or a friend — either with or without an official agreement written by a lawyer — or through a private organization offering lending services. Depending on the route taken, interest rates can vary greatly compared to other financing options.

Often, borrowing money from a family or friend won’t have interest attached to it, so long as they pay the loan back in full. Other times, a relative or friend may include interest agreed upon by both parties. When borrowing from a private lending service, their rates may be as high as they choose since it is a private organization.  

401k or Savings Accounts

Homeowners choosing to fund their home improvement projects from their 401kor savings accounts are another popular option for financing an upcoming project. Depending on whether the employer allows it, a homeowner can pull from their 401k, typically up to $100,000 or 50% of the vest balance, to a loan. One major benefit of this funding method is that it doesn’t require homeowners to pay taxes on the amount they withdraw, but they will need to pay it back within 5 years.

There are also the benefits of not having the pay interest to lending institutions. Because the loan is coming from money the homeowner has saved, they make interest payments back to the owner’s retirement account. Interest rates tend to be lower on 401k loans compared to funding with a credit card or private loan. 401k loans use what’s called cash advantage, i.e., the difference between the interest rate of private loans and any lost investment earnings. If a homeowner can take out a credit card cash advance with an interest rate of 7%, but their 401k portfolio is producing a rate of return at 4%, the cost advantage of choosing a 401(k) loan is 3. Positive cost advantages make 401(k) loans a more appealable option, and though only 32% of Americans have a 401(k), it is still a frequently used method for funding home improvement projects.

Personal Line of Credit

Personal lines of credit are personal loans used to pay for home improvement projects or home upgrades that are paid back in monthly installments. Unlike other financing methods, personal lines of credit are granted based on the applicant’s credit score and annual income, and not on the equity of the home.

These types of loans are unsecured, which means there is a higher interest rate tied to them compared to other financing options. Though interest rates are higher, fixed payment schedules and fast funding options allow homeowners to properly budget and get the money they need for the project quicker.

Personal Loan

Personal loans are a lump sum agreed upon and released all at once. Personal loans differ from personal lines of credits in the sense that personal lines of credit are funds available to use as needed, up to a certain amount, such as credit cards.

Personal loans also offer lower interests rated compared to credit cards, but still require monthly repayments. However, depending on the lending source (such as a bank or credit union), personal loans may tie directly to the applicant’s credit score. They may grant individuals with great credit higher total amounts and even multiple personal loans taken out at a time, whereas individuals with lower credit may see restrictions.

Personal loans are great for onetime large purchases, such as adding an addition or renovating a home. Personal loans do typically end up saving money on interest payments, making them more appealing option against lines of credit, but it’s best to look at all interest rates and repayment options when comparing options for financing a home improvement project.

Passbook Savings Loan

Passbook loans are personal loans granted by the homeowner’s savings account financial institution, using the savings account balance as collateral for the loan. In other words, it’s a loan taken out against the savings account of the applicant of the loan. Each bank is different, but most will allow a passbook savings loan amount up to 100% of the total savings account balance.

As the lender pays off the loan, they will get access back to their savings. Passbook loans help build credit, but only if the bank reports it to credit bureaus. Even though passbook loans are lower interest and still earn dividends, defaulting on the loan could mean a homeowner’s losing their savings account.


Cash is the most straightforward option on the list. Paying with cash for home improvement projects eliminates compiling interest rates, risk of missing payments, and even taking out a loan at all.

Many homeowners paying with cash have different sources of funding. Some maybe given cash as an inheritance or gift, while others withdraw from their personal savings. Regardless of the method, paying in cash is a preferred method by all parties involved when starting a home improvement project. The contractor doesn’t need to worry about how or when they’re getting paid, and the homeowner doesn’t need to deal with the hassle of applying for loans or other lending options.

NJPB’s Recommendation

It is common for most of our clients to utilize multiple funding sources to finance their projects. We never want to see any of our clients overextended, so it’s best that you understand all avenues to take when deciding how to finance a project. It is always wise to diversify sources so that you don’t put too much strain on any one of your financial resources. You must speak with all of your financial institutions to see what incentives and interest rates are available so you can make the best decision for your unique situation.

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