Buying a tiger. Following David Hasselhoff around on his European tour. Visiting every Applebee’s in the United States. Just knowing what $10,000 in cash smells like. People have applied for loans for very strange reasons.


We don’t know whether those particular dreamers’ loan applications were actually approved. But we can tell you this: borrowing money so you can remodel your house – i.e. your largest piece of equity, where you spend the majority of your time – is perfectly normal. In fact, the majority of homeowners say they would use their credit cards to cover the costs of home improvement projects. There are many ways to finance a home remodel. Let’s review some of the more popular options so you know which one is your best bet when you want a new kitchen or bathroom!


Pay Cash

Let’s begin with the most obvious way to finance remodeling: cold hard cash. It’s the ideal solution, so long as you (A) have it, and (B) can spare it. There is no interest. There are no application fees. There is also no risk of a lender foreclosing on your home for nonpayment (assuming you don’t need that cash to pay for your mortgage).


If you do decide to pay for a remodeling project with cash, take caution. It’s advisable to set aside 20 to 30% of your project cost in case the unexpected happens (and trust us, it often does).


Borrow From Friends & Family

This is a risky recommendation. We don’t know whether you even have friends or family with enough money lying around to finance your home remodel – and if you do, we can’t say whether they’d actually lend it to you.


That said, borrowing cash from a friend or family member has huge advantages. No forms to fill out. No application fee to pay. The “lender” most likely won’t charge you interest. And if they do, they still won’t be able to foreclose on your home if you don’t pay them back. You do want to pay them back, of course. No home remodel is worth sabotaging a valued relationship over.



Take Out a Home Equity Loan

Even if you haven’t finished paying off your mortgage, you still have equity in your home. A home equity loan lets you liquidate some or all of the money you have already invested in your property so you can put it toward an important purpose, such as remodeling.


You have options when it comes to accessing your existing equity. A home equity loan gives you one lump sum – perfect for a remodel, which you should know the total cost of upfront. A home equity line of credit (HELOC) functions more like a credit card, where you draw smaller amounts from your equity as needed.


Although both of these loans charge interest, their rates typically aren’t as high as a credit card. Home equity loans usually have fixed rates, which can make personal financial planning easier via predictable monthly payments. HELOCs have adjustable rates, which can increase (which is bad) or decrease (which is good) depending on market variables outside of your control. Regardless of which of these options you prefer, take special care that your home is your collateral. The lender can foreclose if you fail to pay back a home equity loan or HELOC.


Refinance Your Mortgage

A cash-out refinance works on a simple principle: replace your existing mortgage with a new, larger loan. This type of financing option is especially attractive if you are able to receive a lower interest rate than the one you are currently paying (although mortgage rates are relatively high at the time of writing). Many homeowners find cash-out refinancing to be more convenient, as they are already accustomed to budgeting for and paying their mortgages.


Cash-out refinancing isn’t all wine and roses, of course. You will effectively reset the clock on your mortgage, which is an unsavory prospect if you’re looking forward to imminent retirement. The process of applying for a mortgage is also time consuming, and oftentimes frustrating despite well-meaning loan officers’ best efforts.


Take Out a Home Improvement Loan

Don’t want to tap into your existing home equity or mess with your mortgage? Then a home improvement loan may be your best option. As an unsecured loan, it does not use your home as collateral. It enables you to borrow more money than you could have with a credit card, as well as pay lower interest. Home improvement loans also typically have shorter repayment periods, which makes taking one out a little more palatable than a 15- or 30-year mortgage.


Home improvement loans do typically have higher rates than ones that are backed by home equity, however. Applying for one takes relatively more time and effort, and whether you succeed depends heavily on your credit score. Furthermore, many lenders charge additional fees when their clients repay home improvement loans early.


Use a Credit Card

So long as your home improvement project will not cost more than your credit limit, you may choose to pay for it with your current credit card. It’s a viable course of action if your cash flow will allow you to keep up with your payments, and it becomes even more attractive if you don’t want to fill out additional paperwork or offer your home as collateral.


The risks of charging a large remodel to your credit card are very real, though. If you have a high interest rate, you’ll wind up spending significantly more than you would have had you taken out a loan. You’ll damage your credit score if you don’t repay in time, and maxing out your card before the project is finished will leave you in a real bind.


If you’re planning a remodel in Central Minnesota, then we welcome you to contact Wensmann Contractors today to learn more about your financing options. Our previous clients have used every financing method possible, so we have a pretty good idea of which ones are most popular, as well as which ones are more practical given your unique circumstances.