Best Way to Finance Home Improvements

Finding the “best way to finance home improvements” depends on your income, savings, the size of your project, and your plans for the future. Paying cash is usually the cheapest option, but many homeowners need other ways to pay to complete their projects. From using your home equity to tapping into government programs, the right choice can help you finish your upgrades without putting too much pressure on your budget.

Home improvements are more than cosmetic changes; they are an investment in your home and your future. Regular upkeep and smart upgrades can raise your home’s value and make it more comfortable and useful. But the price tag can feel overwhelming, with projects running from a few thousand dollars to well over $50,000. This article explains the main ways to pay for repairs and upgrades and helps you work through the different options so you can pick what works best for you in 2025.

What Factors Should You Consider Before Financing Home Improvements?

Before you start filling out loan forms or signing contracts, take a moment to look at a few key points. Understanding these will help you pick the right way to pay and keep your project on budget and on schedule.

How Much Does Your Renovation Project Cost?

The first and most important step is knowing the full cost of your project. Renovations include more than materials and labor. You may also need permits, inspections, and you should expect at least a few “hidden surprises” once work begins. For example:

• Kitchen remodel: roughly $26,790 to $79,982 (high-end finishes like marble will push you toward the top end)
• Bathroom remodel: around $25,251
• Roof replacement: around $30,680
• Landscaping: around $3,525

Get several quotes from contractors and add a 10-20% cushion for unexpected costs. Do not move forward until you understand all the line items, including possible loan interest and lender fees. Once you know how much you really need, you can choose the type of financing that fits that amount.

Does Your Credit Score Affect Loan Options?

Yes. Your credit score has a big impact on which loans you can get and what interest rate you’ll pay. A strong score can lead to better terms, lower rates, and more choices. Lenders usually review your credit score, your credit history, and your debt-to-income ratio to decide how much you can borrow, especially for unsecured loans like personal loans or home improvement loans.

A lower score can limit your options or lead to higher interest, which makes your project more expensive. If time allows and your score is weak, it may help to work on improving it before you apply.

How Much Home Equity Do You Have?

Home equity is the difference between your home’s current market value and the total amount you still owe on it (including your mortgage and any other liens). If you have built up a good amount of equity, it can be one of the cheaper ways to finance upgrades. Home equity loans, Home Equity Lines of Credit (HELOCs), and cash-out refinances all use this equity and often come with lower rates than unsecured loans.

If you have little or no equity, options like personal loans, certain home improvement loans, or government-backed programs may be more realistic. Knowing how much equity you have is a key part of deciding what you can use.

When Is Financing Home Improvements a Good Idea?

A new kitchen or extra living space is appealing, but you should think carefully before taking on debt. Not every project justifies a loan, and careful planning can save you money and stress later.

Is It Better to Finance or Pay with Cash?

Paying cash is usually the cheapest way to handle home improvements. You avoid interest, extra fees, and new monthly payments. Some contractors may even give a discount for cash instead of credit cards. If you have plenty of savings set aside for home projects, using cash can be a low-stress option.

But paying cash is not always possible or wise. Using up all your savings, especially your emergency fund, for a planned project can leave you exposed if you lose your job or face a big surprise expense. Try to keep several months of living costs in reserve. If your project is large and your savings are limited, using financing can make sense. You can also mix methods: use some cash and borrow the rest.

Should You Finance Emergency Repairs?

For emergencies that affect safety or health, financing often makes sense. Think about burst pipes, a leaking or failing roof, or unsafe electrical wiring. These cannot wait until you save enough money. In urgent cases, quick access to cash matters, and options like personal loans or HELOCs can help you fix the problem right away.

Financing can also be smart for projects that need to happen soon (within the next year) and that you cannot cover from savings. This is especially true for upgrades that add space, improve energy efficiency, or make your home more comfortable for many years-especially if you plan to stay put for a long time. Financing can also be reasonable if the work is likely to raise your home’s resale value.

What Are the Main Ways to Finance Home Improvements?

You have many ways to pay for a renovation, and each comes with its own pros and cons. Knowing how each one works makes it easier to match the right tool to your project.

Cash From Savings

This is the simplest option. If you have the money, paying with cash avoids interest, fees, and added monthly bills. Your home is not at risk, since you’re not borrowing against it. But this requires strong savings and should not drain your emergency fund, which you need for unexpected events.

Home Equity Loan

A home equity loan lets you borrow a lump sum against the equity in your home. It works like a second mortgage with a fixed rate and fixed monthly payments, usually over 5-15 years. If used for major improvements, the interest may be tax-deductible through 2025. This type of loan works well for big, clear projects where you know the full cost from the start.

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit, similar to a credit card, secured by your home. You can draw on it as needed up to a set limit, and you pay interest only on what you actually use. This flexibility is useful for long or multi-stage projects. HELOCs usually have variable rates, so your payment can change, though some lenders offer fixed-rate options for part or all of the balance. Interest may be tax-deductible when used for home improvements.

Cash-Out Refinance

With a cash-out refinance, you replace your old mortgage with a new, higher one and get the difference in cash. This can work well if current mortgage rates are lower than what you’re paying now, since you could reduce the rate on your whole loan while getting money for renovations. The trade-offs: your mortgage term starts over, you may pay more interest over time, and you will face closing costs similar to a regular refinance.

Personal Loan

A personal loan is unsecured, meaning it doesn’t use your home as collateral. That usually makes it faster to get and a good option if you don’t have much equity. Personal loans typically have fixed interest rates and fixed payments. Because they’re unsecured, rates are often higher than home equity options and the interest is usually not tax-deductible. They are usually best for small to mid-sized projects.

Credit Card

Credit cards can work for small jobs or emergencies, especially if you can get a 0% APR offer and pay off the balance before the promotion ends. They are convenient and might earn rewards. But outside promo periods, credit cards tend to have very high interest rates, making them a costly way to fund bigger projects.

Home Improvement Loan

Some lenders offer “home improvement loans.” These can be secured or unsecured. Unsecured versions are much like personal loans: fixed rates, no collateral, easier approval for those with good credit. Secured options may offer lower rates but require collateral such as your home. Loan amounts tend to be smaller than equity-based loans, and interest usually isn’t tax-deductible.

Government Loans and Grants

Federal programs, especially through the Department of Housing and Urban Development (HUD), help make repairs and upgrades easier to afford. These include FHA Title 1 loans and FHA 203(k) loans, which are useful for essential repairs or for wrapping renovation costs into a home purchase. Qualification may depend on income, age, where you live, the type of property, or veteran status. These programs rarely give “free money,” but they can offer low-cost help.

Contractor Financing

Many contractors work with finance companies and offer loans right on their bids. This can be convenient and speed up the process from approval to project start. These loans are often unsecured and based on your credit profile.

The downside is you may not get the lowest rate because you are not shopping around. You may also feel nudged to accept a higher loan amount than you really need. Always compare offers and read all terms before agreeing.

Local and State Assistance

Many cities, states, and nonprofit groups offer loans or grants for repairs and upgrades. These often focus on:

• Energy efficiency (insulation, windows, HVAC)
• Help for low-income homeowners
• Emergency or safety-related repairs

Programs differ widely by area, so check with your local housing office or community nonprofits to see what’s available.

How Do Home Equity Loan, HELOC, and Cash-Out Refinance Compare?

These three choices all use your home’s equity, but they work in different ways. Understanding those differences will help you pick the right one for your project type and risk comfort.

How a Home Equity Loan Works

A home equity loan is a second mortgage that pays you a lump sum based on how much equity you have. You start paying it back right away with fixed monthly payments over a set term (often 5-15 years). This steady payment schedule makes it a strong fit for large projects with clear budgets, such as a full kitchen renovation or a new addition.

Rates are usually fixed and lower than personal loans or credit cards, because the loan is secured by your home. Interest may be tax-deductible if used for major improvements. But if you fall behind on payments, you risk losing your home.

How a HELOC Works

A HELOC gives you a credit line instead of a lump sum. During the “draw period,” you can take money out as you need it, up to the limit. You pay interest only on what you’ve drawn. This is useful for projects with shifting costs or several stages. After the draw period ends, you enter the repayment period and must pay back both principal and interest.

Most HELOCs have variable rates, so your payment can move up or down when market rates change. As with home equity loans, your house is the collateral, and interest used for home improvements may be tax-deductible.

What Is a Cash-Out Refinance?

A cash-out refinance replaces your current mortgage with a new one that’s larger than what you owe. You get the difference in cash. This can work well if you want to roll renovation costs into your main mortgage and current rates are lower than your existing one. It fits very large, one-time projects.

Benefits can include a lower rate on your total mortgage and interest that may be tax-deductible. The trade-offs are a new loan term, possible higher total interest over the life of the loan, reduced equity, and closing costs.

Pros and Cons of Each Option

Option	Best For	Main Pros	Main Cons
Home Equity Loan	Large, fixed-cost projects	Fixed rate, predictable payments, lump sum	Borrow all at once; less flexible for phased work
HELOC	Ongoing or uncertain-cost projects	Flexible draw; pay interest only on what you use	Variable rates; risk of overspending
Cash-Out Refi	Very large, one-time projects	Single mortgage; possible lower overall rate	New loan term; closing costs; less equity

All three use your home as collateral, so missed payments could lead to foreclosure.

Can You Finance Improvements Without Home Equity?

Yes. Many people do not have much equity, especially newer homeowners, and some projects cannot wait. Several options do not require your home as collateral.

Using Personal Loans

Personal loans can work well when you lack equity or do not want to risk your home. They are usually unsecured, so there is no lien on your property and no home appraisal. Lenders instead look at your credit score, income, and debt levels.

Most personal loans have fixed rates and fixed payments, which makes planning your budget easier. The downside is higher interest than equity-based loans, and the interest is generally not tax-deductible. Personal loans are often best for mid-sized projects.

Home Improvement Credit Cards: Benefits and Risks

Big-box home stores often offer their own credit cards. These can be handy if you’ll buy most materials from one place. Some offer 0% interest promos or special discounts. For small projects or quick fixes, this can be useful.

But store cards usually carry very high APRs after promos end. If you don’t pay off the balance in time, interest can pile up quickly. Compare the APR to regular credit cards, and be honest about how fast you can repay. Many people are better off with a standard cash-back card if they can clear the balance each month.

Contractor and Retailer Financing Offers

Many contractors and retailers (windows, HVAC, solar, appliances) offer financing through partners. The main benefit is speed and convenience. You can often apply on the spot and start work sooner. These loans are usually unsecured and based on your credit.

But you give up the chance to compare many lenders, and you may end up with a higher rate. You may also be tempted to borrow more than you planned. Read all terms, including rate, fees, and payment schedule, before signing anything.

What Government and Nonprofit Programs Are Available?

Besides bank loans, many government and nonprofit options are available to help pay for repairs or upgrades. These often offer better terms for people with lower incomes, older adults, or those in certain areas.

HUD Title 1 Property Improvement Loan

HUD’s Title 1 program offers loans for repairs and improvements, even for homeowners with little equity. You can use these funds for remodeling, repairs, or similar work. You don’t need high equity to qualify, and the loan details-such as amount and term-depend on your property type.

For DIY projects, Title 1 loans will pay for materials only. If you hire a contractor, the loan can cover both labor and materials. Get clear estimates and understand all costs beforehand. While the government is not giving away free cash, these loans are built to be affordable and to help you protect and improve your home.

FHA 203(k) Rehabilitation Mortgage

The FHA 203(k) program lets you finance both a home’s purchase or refinance and its repairs or upgrades in one mortgage. You can borrow up to $35,000 for repairs or improvements, based on what the home will be worth after the work.

This option is very helpful if you’re buying a fixer-upper or if you already own a home and want to make big changes without needing a lot of upfront equity. You get one loan instead of handling a separate construction loan plus a mortgage.

Fannie Mae HomeStyle Loan

The Fannie Mae HomeStyle Renovation loan also bases your borrowing power on the home’s value after renovations. It is another strong choice for buyers or owners with little equity or for homes that need work right away. It wraps the purchase or refinance and renovation into one loan.

Rates and closing costs can be higher than some standard mortgages, but the convenience of one combined loan can be worth it for many homeowners.

Local, State, and Nonprofit Grants

Many local agencies and nonprofits offer help with repairs and upgrades. Examples include:

• 0% interest loans or small grants for low-income homeowners
• Deferred loans that don’t require payment until you sell or move
• Low-fee repair programs from groups like Habitat for Humanity
• Minor home repair help for seniors or people with disabilities

These often focus on safety, weatherization, energy efficiency, or accessibility rather than luxury updates. Eligibility usually depends on income, age, disability, or where you live.

Tax Credits and Energy Rebates

Tax credits and rebates can reduce the final cost of certain projects. The Inflation Reduction Act, for example, offers sizable tax credits (up to 30%) for many energy-saving upgrades such as solar, heat pumps, and insulation.

States and utilities may also offer rebates at the point of sale for qualifying appliances or systems. Tax credits typically apply to a wide range of incomes, while many rebates target low- and moderate-income households. Talk with a tax professional to understand your options and how to claim them.

How to Choose the Best Financing Option for Your Home Improvement

With so many choices, it helps to follow a simple step-by-step approach. Match the size and timing of your project with your income, savings, and comfort with risk.

Reviewing Your Budget and Loan Amount

Start by building a clear project budget. Include:

• Materials and labor
• Permits and inspections
• A 10-20% cushion for surprises

Once you have a solid total, you’ll know how much you need to borrow. Lenders have minimum and maximum loan sizes, so your project cost will help narrow your choices. Small cosmetic jobs might fit on a credit card or personal loan; major structural work may call for a home equity loan or cash-out refinance.

Also split your list into “needs” and “wants.” Fixes that protect your home or safety should come first. Extras and cosmetic changes can wait or be reduced. Borrowing only what you truly need helps keep interest costs down.

Comparing Interest Rates and Loan Terms

The interest rate has a big impact on what you pay over time. A lower APR means lower overall cost. Shop around with banks, credit unions, and online lenders instead of accepting the first offer.

Look at the term as well:

• Shorter term = higher monthly payment, less total interest
• Longer term = lower monthly payment, more total interest

Think about how long you’ll be paying, especially if the loan might extend into your retirement years. Also check if the rate is fixed or variable. Fixed rates keep payments steady; variable rates can rise or fall over time.

Reviewing Fees and Closing Costs

Interest is not the only cost. Many loans include:

• Origination fees
• Appraisal fees (common for equity loans)
• Annual fees (often for HELOCs)
• Prepayment penalties
• Closing costs (for refinances)

Ask each lender for a full fee breakdown. Sometimes a loan with a slightly higher rate but lower fees is cheaper overall than one with a low rate and heavy upfront charges.

Checking Eligibility and Approval Requirements

Every option has its own rules. For equity loans, HELOCs, and cash-out refinances, you usually need enough equity, good credit, and a manageable debt-to-income ratio. For personal loans and unsecured home improvement loans, a strong credit score and stable income help you qualify for the best rates. Government and nonprofit programs may set limits by income, age, property type, or location.

Read the requirements before applying so you don’t apply for products you’re unlikely to get. Prepare documents like pay stubs, tax returns, and contractor estimates in advance to speed up approval.

Managing Payments and Project Timelines

Match the financing method to how quickly you need the money and how your project will unfold:

• Emergency work: personal loans or HELOCs usually fund faster than a refinance.
• Phased projects: a HELOC is often better than a lump-sum home equity loan.

Set up a payment plan with your contractor that ties payments to clear milestones instead of paying most of the cost upfront. This helps protect you and encourages steady progress.

The right option is one you can pay back comfortably without stretching your budget too far. Careful research and, if helpful, a conversation with a lender or housing counselor can point you to the best fit.

Tips to Save Money When Financing Home Improvements

Even if you borrow, you can still keep costs down. Planning, careful shopping, and smart choices can lower both your project price and your financing costs.

Create a Detailed Budget and Timeline

A clear budget is one of the best money-saving tools you have. List every expected cost-labor, materials, permits-and add a 10-20% reserve for surprises. This helps you avoid needing extra loans later or cutting corners on quality.

A timeline helps you spread costs and avoid spending everything at once. Knowing exactly how much you need to borrow helps you avoid extra debt and the interest that comes with it. Getting multiple contractor bids is a key part of this step, so you understand the normal price range for your project.

Get Multiple Quotes from Contractors

Once you know what you want done, ask at least three licensed, well-reviewed contractors for written quotes. Compare:

• Total cost
• Breakdown of labor and materials
• Estimated start and finish dates
• Payment schedule

Use the quotes to spot big differences and ask questions. A reliable contractor should explain their numbers clearly. Sometimes the lowest bid is missing key items or uses lower-quality materials, so read carefully before choosing. Make sure you understand everything in the contract before you sign.

Explore DIY for Small Projects

If you have the skills and tools, doing small, safe projects yourself can cut costs. Examples include:

• Painting interior walls
• Changing cabinet hardware
• Swapping out light fixtures or faucets (if you’re comfortable)
• Simple backsplash installations
• Basic landscaping and yard cleanup

But be honest about your abilities. Structural work, major plumbing, and electrical jobs can be dangerous and costly to fix if done wrong. Hire pros for anything that affects your home’s structure or safety.

Understand Tax Deductions and Credits

Tax rules can reduce your final cost. Interest on home equity loans and HELOCs may be deductible through 2025 if used for substantial home improvements. That effectively lowers the price of borrowing.

Energy-related credits and rebates, including those linked to the Inflation Reduction Act, can offset part of the cost of solar panels, heat pumps, insulation, and similar upgrades. Talk with a tax professional to see which rules apply to you. Keep thorough records of all your costs and loan paperwork so you can claim any benefits you qualify for.

Frequently Asked Questions About Financing Home Improvements

Here are answers to some common questions homeowners ask when planning how to pay for projects.

Who Qualifies for a Home Improvement Loan?

Qualification depends on the type of loan:

• Equity-based loans (home equity loans, HELOCs, cash-out refinances): Lenders usually want:
  • Enough equity in your home
  • A good credit score (often 680+)
  • A reasonable debt-to-income ratio
• Unsecured loans (personal loans, some home improvement loans): Lenders focus heavily on your credit score, income, and payment history since there is no collateral.
• Government and local programs: These often look at income, age, property type, location, or status (such as veteran or rural homeowner).

Check the rules for each loan or program you’re considering so you know where you stand.

Does Financing Home Improvements Affect Home Value?

The loan itself doesn’t change your home’s value, but the work you do with that money might. Many upgrades increase value and equity, such as:

• Kitchen and bathroom remodels
• Curb appeal updates (landscaping, siding, exterior paint, windows)
• Energy-saving upgrades (solar, efficient HVAC, insulation)

On the other hand, very personal or extremely high-end projects that don’t fit your neighborhood may not add much value. Some projects are worth doing just for your own comfort, but if you plan to sell soon, think about how buyers might view the changes.

Are Home Improvement Loans Tax Deductible?

It depends on the loan and how you use it. Under current IRS rules (through 2025):

• Interest on home equity loans and HELOCs can be deductible if the money is used to buy, build, or substantially improve the home that secures the loan, subject to IRS limits.
• Interest on unsecured loans (like most personal or standard home improvement loans) is usually not deductible, even if used for renovations.
• Credit card interest is generally not deductible.

Because tax rules are complex and can change, talk with a tax advisor before making big borrowing decisions for home improvements.