How To Pay for Home Renovations and Improvements

Whether you’re making small repairs around your property or extensive renovations, here are a few tips on how to pay for home improvements this year.
 

Spring is the perfect time to give your home a clear out, declutter, and even work on some of those bigger projects you put on hold during the winter months. Whether you’re making small repairs around your property or extensive renovations, here are a few tips on how to pay for home renovations and  improvements this year.

Savings

Ideally, the first place you should be looking to finance your home upgrades is your own savings account. Even if you’re planning extensive renovations like a new kitchen, bathroom, or an extension, you should start budgeting for that expense as soon as possible.

Credit Card

For small projects where you don’t have cash on hand, using a credit card can be a good option. That’s not to say you can’t use your credit card for major renovations too, especially if you have a high credit limit. 

But remember that interest will accrue if you don’t pay off the card balance as soon as possible, so this can quickly add up with more expensive projects. If you’re looking for financing for new appliances or homeware, a credit card should be fine. It may be worth considering other financing options if you’re looking at long-term debt to cover the renovation costs.

Home Equity Loan

A home improvement loan, like a home equity loan, means that you can borrow against the equity you’ve already built in your property. These are typically fixed term loans lasting from five to fifteen years, meaning you’ll know exactly how much you’ll be paying back over the lifetime of the loan. 

You can also calculate your current home equity and determine what amount you may be able to borrow before you look into taking out a loan in more detail.

The interest on a home renovation loan is may be tax-deductible when used for repairs or major improvements to your property, making this a good option when considering how to pay for home renovations. You may be required to borrow at least $10,000 for this type of loan, which is often ideal for medium to large projects rather than smaller upgrades.

Home Equity Line of Credit

Another type of home equity loan for renovations is a home equity line of credit, or HELOC. Much like a credit card, a HELOC is a revolving line of credit that you can borrow against until a set date. Once you’ve repaid that amount, you can borrow up to the full amount again and repeat this over and over until the loan end date.

HELOC’s have variable interest rates, so you can end up paying more if the market interest goes up while you have your loan. However, you’re only required to pay interest on the amount you actually borrow, not the full amount of loan you’re eligible for.

These loans also may be tax-deductible for home renovation projects and typically come with a required minimum loan amount of $10,000.

Read more about the HELOC process in How Long Does It Take To Get A HELOC?

Mortgage Refinance

If taking on an additional loan to pay for your home renovations doesn’t sound appealing, you could also consider refinancing your mortgage. This is where you apply for a new home loan to replace your existing one. 

If interest rates have decreased since you took out your original loan, this can help save you money long term. With a cash out refinance, you can take out a loan with a higher amount than your current mortgage and use the cash difference between the two to pay for your home renovations.

Generally, you can only borrow up to 80% of your home’s value with a cash out refinance, so knowing your home equity in advance is useful—usually, 20% is a minimum you must have. You’ll also need a low debt-to-income (DTI) ratio, around 40-50% or less. As with any high value loan, a high credit score is essential.

Before refinancing, it’s important to know that this can be a time-consuming process. You may not be buying a new home, but the mortgage process will be the same, and you need to go through various stages of approvals. 

Rebates

If you live in an older property, you may be eligible for national or state-wide rebates to improve the energy efficiency of your home. For example, the national Inflation Reduction Act of 2023 provides rebates for energy-focused renovations like adding solar panels, insulating homes, or updating heating and cooling systems.

Under the HOMES Rebate Program, Wisconsin residents can receive up to $4,000 in rebates on energy-efficient appliances, insulation, and new windows. Rebate amounts are based on your income and how much energy usage is reduced with renovations. In Illinois, residents may be eligible for tax credits of up to 30% of the cost of qualified home projects to improve energy efficiency.

For those with low-to-moderate incomes, the High-Efficiency Electric Home Rebate Act (HEEHRA) is a 10-year rebate program that helps residents switch to electrical home appliances and systems. In Wisconsin and Illinois, this may be up to $14,000 per household.

Rewards Programs

Make use of any rewards programs you’re currently part of or may be eligible for. This could be through your bank directly, like checking account or credit card rewards programs that offer merchant gift cards to Amazon or other retailers.

With First National Bank and Trust Company, your debit card rewards are redeemable for gift cards, along with giving you access to hundreds of merchant discounts through BaZing Benefits. With a Privilege Plus checking account, you’ll also be eligible for loan discounts if you choose a HELOC or mortgage refinance.

Borrowing Against Your Retirement

Another option available to you is borrowing against your retirement funds. Home renovations are an acceptable reason for taking money out of your 401(k) early without penalties, but with many other options available to you, this isn’t recommended.

There are risks involved with this, namely that you’re lowering the amount of money you’ll have available in retirement and not benefiting from the compound interest your retirement accounts accrue over time. If you lose your job, you’ll also may be required to pay back the entirety of the loan within 30 to 60 days of termination.

Smart Home Improvement Tips

There are plenty of options out there for financing your home renovations, but there are also several tactics that you can use straight away to make your home upgrades more affordable.

Prioritizing your repairs is essential. Anything that requires fixing or upgrading should immediately go to the top of your project list over anything that’s a cosmetic improvement of a “nice to have” renovation. Maintain your home as best you can with spring cleaning and winterizing each year to avoid potential problems and costly repairs later.

Take control of your renovation budget early on and plan ahead for any major home projects you’d like to do, along with planning for any emergencies that may occur throughout the renovation. Shop around for appliances and buy during sales if possible—around major holidays like July 4 and Thanksgiving, most appliances will go on sale.

Wherever you can, you should try to complete renovations yourself to save money. But also know the limit of your abilities. It’s much cheaper, in the long run, to hire a skilled contractor for bigger jobs if you’re not comfortable completing that work on your own.

Finance Your Renovations with First National Bank and Trust

When you’re ready to get started on your home improvements, FNBT can help you determine the best way to pay for home renovations and walk you through the financing process. Please apply online or visit us in-branch at one of our many Southern Wisconsin and Northern Illinois locations. Talk with a lender about your home renovation plans and budget and assess the financing options available.