Many things about home renovation are flexible. You can always change wall colors or nudge a wall another six inches. One thing is certain: you need money. Not a single nail gets hammered, no wires run or foundation poured without money.
Here are the most popular ways of funding your home renovation, from the most desirable to least desirable:
Cash & Liquid Assets
The most readily available money you can have is in savings, checking, CDs and savings bonds near maturity. Cash is absolutely the cleanest, freest way to pay for your project, as you are not indebted to a lender.
Pros
No interest, no fees, no charges.
You are not dependent on anyone else.
Funding speed is instantaneous; no need to wait on anyone to liquidate these funds.
Cons
Depletes any reserves you may have.
Most people do not have a lot of cash available for larger projects, such as additions and full-room remodeling.
Take Away: Cash and liquid assets are the best way to fund your projects--but only if you have plenty to spare. Some retirement accounts allow you to borrow a certain percentage against them as well.
Sweat Equity
Got any willing friends and family? For the price of a six-pack and a takeout pizza, they may help you put some sweat equity into your renovation project.
Pros
Labor is completely free.
Satisfying to have 100% control of your project.
Cons
Only the labor is free; you still have to pay for materials.
If a learning curve is involved, it still may be cheaper and faster to hire workers.
Take Away: Some sweat equity is inevitable, and even can be fun, but do not stretch it if you are not sure of your abilities.
Zero-Interest Home Remodeling Loans
Home Improvement Program (or "HIP") loans from your county are not exactly free renovation loans, but they do come close. Counties and other municipalities will subsidize some or all of the interest on your remodeling loan in order to help preserve local housing stock.
In one scenario involving a five-year, $50,000 8% loan that is subsidized 3% through HIP, your total interest savings would be $4,215.
Pros
Essentially free money in the form of subsidized interest for your loan--subsidies which you do not have to repay.
Cons
Loans are typically capped at between $25,000 and $50,000.
Property taxes still must be paid by you, including the elevated taxes that come as a result of your home improvement.
Substantial red-tape associated with securing these subsidies, including monitoring of the project, time window for completion, and narrow definition of home-related projects (for example, swimming pools, hot tubs, decks and other luxury-type items are not financed).
Take Away: HIPs are not for every homeowner, but if you qualify, it is an unbeatable deal.
Home Equity Loan Or Line Of Credit (HELOC)
A home equity loan is the classic way to finance home renovations. Take out a loan against the equity in your own house. A home equity loan is basically a second mortgage, in which you take out the total amount you intend to borrow in one lump sum and pay it back every month.
Pros
Large amounts of money may be available for large projects like additions.
Lower interest rates than personal loans and credit cards.
Cons
If you keep depleting your equity, you reduce the sum you will receive when you eventually sell the house.
The large amounts available with this loan encourage spending on things unrelated to the renovation.
Take Away: Target this loan only for large projects such as additions, pools, driveways and siding.
Credit Cards
A credit card that you pay off at the end of each month or a zero-interest that you don't have to pay off for six months or a year. Some homeowners pay off one zero-interest card with yet another zero-interest card, thereby creating a permanent, but risky, no-interest loan.
Pros
Money available quickly.
Lucrative points or rewards possible on some cards by charging large home-related purchases.
Cons
Danger of high interest and fees.
Give you false sense of security that you have more money than you actually have.
Take Away: A tricky way to finance home renovations, and one that requires attention and maintenance.