How do you pay for home renovations?

Maybe you’re tired of staring at the aging cabinetry and outdated countertops that adorn your kitchen. Or maybe you’re worried that your deck really will cave in the next time you attempt to eat outdoors. There are plenty of good reasons to invest in home improvements, whether your goal is to increase your property’s resale value, enhance your quality of life, or both. But renovations cost money, so you’ll need to consider the best way to pay for yours. Here are some options to think about.

Tap your savings

If you have money in a savings account you can use to fund your home improvements, then withdrawing that cash is your best bet. That way, you won’t incur interest charges in the course of renovating your property, and you’ll gain peace of mind by not taking on debt and having additional monthly payments hanging over your head.

That said, don’t deplete your emergency fund to pay for work that’s being done on your home. In fact, don’t even make a tiny withdrawal from that account. Your emergency fund should be saved for unplanned expenses only, and if you raid yours to fund renovations, you’ll risk coming up short when an unavoidable bill pops up later on.

Get Rid of Your Private Mortgage Insurance

With home values rising again in many real estate markets, it’s possible your home value is now high enough to allow you to cancel your private mortgage insurance. Most mortgage banks let you drop your policy once you have 20% equity (for example, your home value is $100,000 and your mortgage is $80,000, leaving you with $20,000 in equity).

File an Amended Return

File an amended return for a home-related tax deduction or credit you failed to take. It’s easy to make a common home owner tax mistake, such as not taking a deduction when you modify your home for medical reasons or when your home was damaged in a disaster. It’s quick and easy to amend your return and get a refund to help fund your renovation.

Use your credit cards

Let’s be clear: Charging home renovations on a credit card isn’t the best idea, as you’ll risk paying a ton of interest on that debt. But if you’re desperate to get that work done (say, you have a bathroom that’s basically unusable in its current state), and you can’t borrow against your home or qualify for a personal loan, then credit cards may be your only option. If that’s the case, proceed with caution, and keep your renovation costs as low as possible.

Of course, if you have enough money in savings to pay for your renovations, but are also able to charge them on a credit card without incurring added costs (some contractors or companies charge extra for credit card usage), then it pays to do so. That way, you can rack up some reward points, and then pay your balance in full before interest starts accruing.

Your goal in funding a home renovation project should be to walk away with as little debt as possible. If you’re not in a position to pay for your home improvements outright, it could make sense to put off that work for another year or two, boost your savings, and then cover your renovations with cash. That way, you won’t risk taking on debt that you’ll struggle to keep up with after the fact.

Mortgage refinancing

While it may seem like the most daunting option, refinancing your mortgage can ultimately be the most cost-effective way to fund a home renovation project if interest rates are lower than the existing interest rate on your mortgage.

Personal loans

If you have a fixed amount for your home renovation budget, and it’s relatively small, you might instead want to consider a personal loan.

Personal loans are also quick to secure and require relatively little paperwork. Personal loans offer you flexibility when it comes to deciding exactly what you want to do with your loan. If you’ve started pricing your renovation and predict that the dollar figure could increase over your initial estimates, skipping both the personal loan and credit card options. Once project costs increase, tapping your home equity may become advantageous due to the low interest rate.

Home equity

If you have enough equity in your home, you’ll have the option to borrow against it to fund your renovations. You can do this in two ways — with a home equity loan, or a home equity line of credit (HELOC). With the former, you borrow a preset amount of money up front, and then repay it over time. With the latter, you’re given access to a certain amount of money, and you can make withdrawals against that line of credit as you need to.

Qualifying for a home equity loan or HELOC is fairly easy, because your property is used as collateral. If you don’t make payments on your loan, your lender can seize your home (which is a bad thing for you, but protection for your lender). As such, you might snag a pretty favorable interest rate on a home equity loan or HELOC. But only borrow what you can easily afford to pay back, because you really don’t want to risk losing your home.

Before You Start Home Renovations…

First, make sure your improvements are suitable for your home and your neighborhood. Doing a top of the line remodel with high-end finishes might price you out of your area. Also, before you dive into a project, consider how long you plan to live in your home. If you plan to be in your home for several years, think about projects in which you’ll get enjoyment.

There is no sense in sinking thousands into a new gourmet kitchen if you don’t cook. Or doing a complete remodel of a guest bathroom rarely used. If you plan to move soon, think about resale. Will you be able to recoup the costs of the renovations? Are the finishes neutral enough to appeal to most buyers? Are the upgrades what one would expect in your neighborhood?