Home Renovations: Using a Credit Card or Home Equity

Key takeaways

• Home renovations can often increase your home’s value. In a seller’s market, demand outpacing supply may magnify this effect.

• You could pay for a home renovation using home equity through a home equity loan, home equity line of credit or home equity agreement. These products offer low (or no) interest rates and access to cash.

• Credit cards may work for some people, in some situations, for smaller projects if you have a good credit score and a low-interest card. Because rates average around 15%, interest fees on home renovations with a card will quickly overtake rates with home equity.

Whether updating the kitchen, building out an unfinished basement, or completing an addition, home renovations increase your home’s comfort and functionality, and often, its value.

Paying for a home renovation doesn’t have to be stressful. Traditional financing options like personal or construction loans, credit cards and refinancing work for some homeowners. Those with untapped equity may have additional financing options.

The best financing option for you depends on your credit history, financial health and renovation goals.

How to pay for a home renovation

If you’ve contemplated whether it’s time to build your dream master bathroom or create that perfect outdoor living space, renovating your home, you have several financing options.

Home equity is a useful tool for homeowners who have established value in their homes. A home’s equity is simply the difference between your home’s current value and the remaining amount you own on it. Home equity financing lets you use that equity as you see fit – including for home renovations.

On the other hand, you could use installment loans or credit cards. However, these options usually carry higher interest rates and provide less money.

Ultimately, the best financing option for your financial situation depends on how much money you need and your credit history.

Using home equity financing

With home equity financing, you can pay for a large-scale home renovation. Even with rates for refinancing and home equity loans remaining higher than they have been over the last decade, home equity financing will still save you money compared with credit cards. What’s more, the interest payments for a HELOC or home equity loan may be tax-deductible with certain criteria:

• You must use the funds to substantially improve the home (not for personal use or debt consolidation)

• A “substantial improvement” adds value, prolongs the useful life of the home or adapts it for a new or different use

• The loan amount must not exceed $750,000 for joint filers or $375,000 for single filers.

Options include:

1. The home equity loan

A home equity loan has a set payment schedule and a fixed interest rate. The loan also provides significant funds – as much as 85% of your home’s equity.

This option is good if you:

• Prefer structured payments

• Want a fixed interest rate

• Need all money disbursed immediately

A home equity loan still requires the same closing costs and fees as a primary mortgage.

2. The home equity line of credit

Unlike a home equity loan, the home equity line of credit (HELOC) works like a credit card tied to your home’s value. It has a draw period (where you access funds) followed by a repayment period.

The HELOC is best if you:

• Prefer a lower interest rate than on credit cards

• Want to make interest-only payments during the draw

• Need funds at different times, and of different amounts, rather than all at once

The HELOC’s interest rate, however, is variable. This means that your rate will fluctuate with the economy.

3. The home equity agreement

The home equity agreement is a unique option. It is a form of equity financing. You won’t pay monthly debt or interest payments. Instead, in exchange for a percentage of your home’s future value, the HEA provider gives you cash up front in proportion to the equity you’ve established in your home.

If you want to settle the agreement, you can sell your home, buy out the provider’s interest with cash on hand. You can also use a refinance, HELOC or home equity loan to obtain funds and pay the HEA provider its share.

You might consider a home equity agreement if:

• You’ve established equity in your home

• You want to avoid ongoing payments of principal and interest

• You need a more flexible application process. 

Using credit cards

Home equity financing provides cash in proportion to your home’s value. On the other hand, credit cards are like unsecured loans not backed by collateral. The lender will determine your credit limit and interest rate based on credit history, types of credit and income.

Those with the best rates can apply for a 0% introductory rate card. After the introductory rate ends, the credit card company won’t charge you interest so long as you pay off your balance before the billing cycle closes. However, the average credit card user can expect to pay from 16% to 30% interest once the intro rate is over.

While this makes credit cards an unwise option for many homeowners, they can be helpful if you know you can pay off your balance in full each month, or in the case of the 0% card, before the promotional period ends.

Consider financing your home renovation with an Unlock Technologies home equity agreement

Renovating your home can build value while increasing comfort. Perhaps it’s time to finish your basement or build that backyard space you’ve always wanted. No matter the project, Unlock can walk you through the process to get the funding you need.