Whether it is a new kitchen, a room addition or a fixer-upper you are about to buy, there are several ways to finance the work. The right one depends on how much equity you have, your current rate, and the size of the project.
The options
- Home equity line of credit (HELOC). A second mortgage you draw from as the work progresses, usually at a variable rate, leaving your existing first mortgage, and its rate, untouched. Good for projects paid in stages.
- Home equity loan. A fixed-rate second mortgage paid out in one lump sum. Good when you know the cost up front.
- Cash-out refinance. One new first mortgage that pays you the difference in cash. Makes the most sense when the new rate is close to or better than your current one.
- FHA 203(k) and similar renovation loans. Finance the purchase and the renovation together, based on the value after improvements. Built for fixer-uppers and buyers with limited equity.
How to choose
If your current mortgage rate is low, a HELOC or home equity loan usually costs less than replacing it. If you are buying, a renovation loan avoids a separate construction loan. We run the numbers for each option on your scenario and show you the monthly payment and the total cost side by side.
Remember that any of these loans is secured by your home, and that whether the interest is tax-deductible depends on how the funds are used. Ask your tax advisor.