Thinking of Doing a Major Home Renovation? Here’s # Realistic Ways to Pay for It

A Reddit user is thinking of doing a major renovation and isn’t sure how to pay for it. The poster said they have cash in a high-yield savings account, but aren’t sure if they should use the account, credit cards, or some other approach to covering the costs.

So, what should you do in this situation when you have a remodel to complete and need to find a way to fund it?  Here are a few options. 

Pay cash

The best option, when possible, is to pay cash for a renovation. Since the poster has the money in a high-yield savings account, paying the contractor directly rather than borrowing is going to be the right move. 

There are many benefits of paying with cash. Obviously, you won’t pay interest. You also don’t have to go apply with a lender to get a loan. However, the poster will also want to make sure that he’s truly financially prepared for the renovations. He should have enough money to cover the costs and a 10% buffer so that if (when) things go over budget, he doesn’t end up scrambling or having to borrow.

The poster should also make arrangements with the contractor to pay over time as each phase of the project is complete, so he isn’t giving the contractor too much money until he’s made sure the work is being performed up to par. Ideally, there will be a professional inspection at each phase of the process (which may be required anyway based on the terms of the permits for the work). That way, the poster can protect his investment. 

Pay with credit cards

The poster had also asked about the possibility of paying with a credit card. This would actually be an ideal option since the Redditor has the money already. He could charge the renovation, earn points or cash back on his card, and then pay the bill in full before interest became due. 

Unfortunately, most contractors do not allow you to pay with a credit card or charge you additional fees if they do, as a result of credit card processing fees. These fees are often more than the value of any rewards that you could earn, so it isn’t worth using the card.

If you are buying materials for the project, though, stores will often accept cards with no added costs. Ask your contractor if you can purchase the materials directly to take advantage of that option. 

Use a personal loan

If you don’t have the cash to pay for a home renovation, you could consider taking out a personal loan. Unfortunately, this will come with added interest fees, and you will have to apply and be approved for the loan.

Because this makes your project cost more due to interest, you should likely use a personal loan only for essential renovations that are time sensitive. If a project can wait, try to delay and save up for it instead of borrowing.

If you do need to borrow, the big benefit of a personal loan is that it is unsecured debt. You do not have to use your house as collateral to borrow. Unfortunately, since unsecured loans are riskier for lenders, this does mean you can expect to pay a higher interest rate than if you borrowed against the property. 

Use a home equity loan

Finally, you have the option of taking out a home equity loan or applying for a home equity line of credit. Home equity loans allow you to borrow a lump sum, while a home equity line of credit gives you access to a set amount of credit you can draw from as needed. 

Both options can come with more affordable interest rates than personal loans.  The interest may also be tax deductible if you itemize on your taxes. Unfortunately, you will need equity in your home to qualify, and your home must serve as collateral, so you risk foreclosure if you don’t pay. There are also added costs, such as appraisal fees and title insurance, to pay for. 

Talking with a financial advisor can be the best way to decide which of these payment options is right for you. Reach out to an advisor early in the process for help determining if your renovation is affordable and exploring the different financing options to find the one that’s right for you.

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