5 Ways to Finance a Home Renovation

Do you have a home renovation plan in your future, but aren't sure of your options to pay for it? Here are five common ways for financing home renovations.

1. Cash

How it works: Paying cash for a home renovation is fairly simple -- you save until you have enough to pay for the project as it occurs. Unlike a loan, there's no interest to be paid either.

What you need to know: For small projects -- new sink in a half bath, for example -- a cash-only policy may make sense. Depending on your income, cash as a way to finance home renovations may not take that long to accumulate. For larger projects, it may be more difficult to save enough in a timely manner to pay for the renovation.

3. Home equity line of credit

How it works: A home equity line of credit allows you to borrow against the equity, or ownership, you already have in the home you are currently living in, Cameron says. Most lenders typically allow you to borrow up to 85 percent of what your house is worth. Here's an example: Say your home is worth $200,000 and you have $100,000 on your mortgage. That means you have 50 percent equity in the house, roughly equal to about $100,000. Take that amount of equity and multiply it by 85 percent -- in this case, $85,000 -- and that's probably what a lender will allow you to borrow. You probably have to pay a certain set amount or percentage off every month, but you can keep the line of credit open -- usually for about 10 years -- even after you pay off the total you've borrowed.

What you need to know: The interest rates for home equity lines of credit are variable, Cameron says, so most people don't borrow the full amount on a home equity line of credit. "Home equity lines of credit are connected to the Federal Reserve's prime rate -- usually prime plus some percentage," she says. That means the amount you are charged to borrow the money may go up or down depending on current market situations.

Cameron says home equity lines of credit, sometimes referred to as rainy day funds, are great for giving homeowners access to home renovation financing as they need it. "You're only paying for what you use, and for smaller projects it's perfect," she says. "For bigger renovations, the changing interest rate may be a factor in whether or not you use a home equity line of credit."

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