What to Consider When Financing Home Improvements

Making repairs and aesthetic upgrades to your home can boost its value. 

So, if you’re planning to put your property on the market, doing some home improvement projects can help you earn more on your sale. Plus, you can use financing to cover renovations, instead of paying out of pocket. When you sell your home, you’ll hopefully make back your investment and be able to comfortably pay off the loans you took out for upgrades.

There are several popular financing options, like home equity lines of credit (HELOCs), other home equity loans, and personal loans that homeowners can leverage for renovations. The question is which is right for you. And the answer lies in assessing key differentiators and researching specifics on any financing option you’d seriously consider.

Start your journey to finding the best renovation financing option by exploring six factors that may influence your decision. 

1. How fast you need the money

Say you’re a month out from putting your home on the market and you want to make a few last-minute renovations. You don’t have the time to go through a lengthy loan approval and underwriting process, like the one for a HELOC, which can take two to six weeks. You need to hit the hardware store this weekend.

Faster options include using a credit card (supposing you can quickly pay it off before interest starts to accumulate), getting a personal loan, or applying for CLoC (closing line of credit), a financing option from Titus designed for homeowners who want to do upgrades and are nearly ready to go to market. 

If time isn’t an issue, let other factors guide you, like amenable interest rates and repayment plans. For example, the aforementioned HELOC could be an excellent low-interest option for someone hoping to do several rounds of renovations over time, as it’s a revolving line of credit that replenishes as you pay off the amount owed. 

2. Interest rates

If you’re renovating your home to boost its value, you’re trying to squeeze the highest possible return from your investment. And the interest on a home improvement loan ultimately comes out of your returns. Take the following example: A homeowner takes out a high-interest (35 percent) personal loan of $50,000, and after making renovations with those funds, they sell their home for $75,000 more than they’d hoped—thanks to the upgrades. The would-be return is $25,000, but since the homeowner’s loan came with $17,500 in interest, they’re really netting only $7,500. 

However, if this homeowner had taken out a fixed-rate HELOC, with a 9 percent interest rate, for the same amount, the interest would only be $4,500. This person would make over $20,000 in returns on their renovations. 

You may wonder why anyone would choose a high-interest loan when other lower-interest options exist. Factors like no or bad credit, not having equity, or needing money in a pinch could push someone to reach for a financing option with a higher interest rate.

3. Origination fees

Origination fees are processing fees on loans, sometimes also called “points” or “discount fees.” This payment traditionally ranges from 0.5 to 1 percent of the total loan amount. Be sure to research the origination fee on any financing option you’re considering, so you’re not taken aback later on. 

As a matter of reference, here are the current origination fees for two popular financing options: 

• HELOCs: Some lenders do not charge origination fees on HELOCs, while others do, and the amount varies. For example, TD Bank charges $99 at the time of this article.

• Personal loans: Major banks, like TD Bank or Wells Fargo, may not charge an origination fee on a personal loan, but other lenders will. According to Business Insider, lenders like Upstart charge origination fees of up to 8 percent.

A final consideration, when assessing origination fees, is the interest on the loan. If the financing option has a low interest rate and a high origination fee, they might balance out.  Or the savings resulting from the lower interest rate could outweigh the origination fee. 

4. Credit impact

Seeking a loan can negatively impact your credit score. And if you’re a homeowner doing renovations to sell your current property, chances are you’ll be trying to get a mortgage on a new place soon. You’ll want a stellar credit report for that. 

Applying for and/or getting approved a new credit card, personal loan, or home equity loan (like a HELOC or second mortgage) can lower your score. Taking out a CLoC, however, won’t affect your score. Be sure to research this point on any loan type you plan to take out. 

5. Penalties

One of the foremost penalties on popular renovation financing options, like HELOCs, is that the lender takes the borrower’s home as collateral. So, if a person defaults on loan payments, the financial institution can foreclose on (take away) their property. 

There are other uncomfortable, but less severe penalties worth considering as well. For example, some personal loans and HELOCs have prepayment penalties (a.k.a. early termination fees), meaning you get charged if you close your line of credit before the stipulated date. Many HELOCs have a 10-year draw period—the time in which you can use the line of credit. If after 5, you decide you no longer want the credit line, you may be charged a percentage of the total amount to terminate it. 

Other common penalties include late fees (i.e., if you make a monthly payment after it’s due) or ones for inactivity. 

6. Eligibility requirements

Another essential consideration is whether you’re eligible for the type of loan you’d like. Here are a few limiting factors: 

• Not having equity: Equity is the amount of your home that you own, calculated by subtracting the amount of your mortgage you’ve paid off from the property’s value. If you don’t have equity in a property, you will not be able to get a HELOC or other types of home equity loans, like second mortgages. 

• Not having good credit: Lenders assess your credit before writing you a loan. So, if your score has been damaged by past experiences (or if you’ve never had a line of credit before), you may have trouble qualifying for any type of home improvement loan. 

• The nature of the loan: A loan’s structure can, in and of itself, be a limiting factor. For example, if you’re a year away from putting your home on the market and plan to do extensive remodeling, it’s unlikely you’d be able to get a CLoC since these loans are intended for more timely projects. And if you’re planning on spending $100,000 on renovations, it might be hard to get a personal loan or credit card with that type of spending limit. However, a HELOC or CLoC could cover your needs. 

CLoC: A financing option created with renovators in mind

Some financing options, like personal loans and HELOCs, can be used on pretty much anything—from debt consolidation to affording college (and yes, renovating, too). But CLoCs are designed for renovations, giving homeowners ample funds to improve their properties and get top dollar for them. 

Titus offers CLoCs of to homeowners who are nearly ready to go to market and want to make home repairs or cosmetic changes. With low origination fees and an application process that won’t affect your credit score, CLoCs are a savvy option. Plus, the loan is closed when you sell and Titus doesn’t charge interest unless you take out more than $25,000. Discover all the perks here.