Many people who own a home have to make improvements at some point, either because they want to or they are forced to. Most home improvements are not cheap, but, fortunately, there are a number of ways to finance them.
Home equity loan
If you have at least 20 percent equity in your home, then you can borrow against any additional equity you have. Say, for example, that you owe $180,000 on your mortgage and you home is worth $250,000. You could borrow $20,000 for a home equity loan, and you could use the proceeds to pay for improvements.
Another way to tap the equity in your home is to refinance. With a refinance, instead of taking out a second loan to tap your equity, you simply replace your mortgage with a bigger one. When you refinance to cash out your equity, it’s called a cash-out refinance.
Not everyone wants to take on more mortgage debt to make improvements, so another option to pay for them is a personal loan. This is a loan you get simply on your good credit, with no collateral. Without collateral, however, you will pay a higher interest rate and won’t be able to borrow as much as you would by borrowing against your home.
Many work-related retirement accounts allow you to borrow money from them. A big advantage to this is that the money is interest-free. Though the loan likely will have an interest rate, you pay that interest back to yourself. A big drawback to such loans is that you lower the amount in your account, which cuts down on your long-term returns. And if you would happen to lose your job while you have an outstanding loan, you have to pay it back immediately or be faced with a tax penalty.