How to Fund Your Home Remodel

By Noah - Dec 1st, 2020

The home you're living in may not be your dream home. Or perhaps it doesn't have the functionality your family requires.  But don't despair:  Home renovations can refresh your living space so your home meets your evolving needs. Or even your wants, whether that’s a larger living room or a spa-style bathroom makeover.

Planning home renovations takes thoughtful consideration and enough funds to turn your dreams into reality. Here’s how to get started, from planning your project to getting your financing in order.

How Much Does a Home Remodel Cost?

Remodeling projects are limited by the scope of your imagination — and the stretch of your wallet.Remodeling costs range widely, depending on square footage, how high-end your taste is, and where you live. In just about every case, though, you may need to budget more than you anticipate.

Home renovation cost by room type

Estimates for home renovations and home improvement projects can run between $18,000 to $76,000 for many projects, although a whole-house remodel can cost significantly more. Here’s how some costs may break down:

  1. DIY half-bathroom or powder room: $3,500-$7,000

  2. High-end master bathroom remodel: $25,000 or more

  3. Minor kitchen remodel (new cabinets, appliances, countertops, and flooring): $25,000

  4. Finish or remodel basement: $10,000-$40,000

  5. Upscale kitchen remodel (custom cabinets, high-end stone or ceramic for counters/backsplash, designer faucets, hardwood floors): $120,000 or more

Is it cheaper to renovate or build a new house?

The per-square-foot cost of remodeling can rise as high as $150, roughly the same as a new construction. People considering a major overhaul often struggle with the question of whether to remodel or start fresh with a new home.

One benefit of fresh construction is that the process is more straightforward. Builders and interior designers can put together plans to your specifications and start with a clear lot. If you watch home remodeling TV shows, you know almost every episode features the dramatic reveal of a problem that adds thousands to the (often strained) budget. This is common in real life, too. Remodeling professionals know major projects routinely run into obstacles as work uncovers unknown issues to fix.

Generally, though, remodeling is less expensive than new construction real estate. Remodeling also allows you to spread costs out more than purchasing a new home- budgeting for the kitchen cabinets one year and the dining room / family room layout the next year if it makes financial sense.

Are home renovations worth it?

Study your local market to assess the best long-term home fit for you. Renovating a historic home in an area where home prices are rising could be a sound investment for some homeowners. For other families, moving out of an old house in a stagnant neighborhood to an exciting new development could be a smarter choice.

If you're planning a home renovation in the hopes that it will increase your resale value, the best home improvements to consider are those that will offer a 75% return on investment (ROI) or higher.

Here are some of the best ROI home remodeling ideas to consider:

  • New garage door:  An attractive and energy-efficient garage door will run you about $3,600 with a nearly 98% ROI.

  • Stone veneer:  Adding a touch of stone to your exterior can net a 95% ROI.  Using low-cost manufactured stone veneer and concentrating on the lower third of your home can keep this project below $9,000.

  • Minor kitchen remodel:  A modest kitchen renovation nets around 81%.  The trick here is to update cabinetry, appliances, countertops, and flooring, but to save money on the renovation by staying away from custom design ideas and keeping the essential layout of your kitchen the same.

  • A wooden deck:  Extend your living space without the price tag of an interior addition.  A wood deck may run around $13,000 and provide you with a 76% ROI when you sell your home.

  • New siding:  Curb appeal counts, which may explain why fresh siding can also score you a 76% ROI.  Expect to spend about $16,000 for roughly 1,250 square feet of vinyl siding.

  • New windows:  Replace drafty windows for energy-efficient models for a 73% ROI.  Plus, you may also see your energy bill go down, which is especially important if you're spending more days working from home.

Can You Finance a Home Remodel?

Home renovation financing is a loan intended for home improvement. If you buy a fixer-upper, your mortgage lender may add some funds to cover renovation costs. You can also get home renovation financing as a personal loan. Some lenders may require documentation, like general contractors’ invoices, as proof that the money went toward your home.

Some options for financing your home remodeling project include:

  1. FHA 203(k) rehab mortgage insurance: A government-backed loan that covers the purchase and renovation of a home.

  2. Fannie Mae HomeStyle loan: You submit home renovation plans to the lender, who holds funds in a custodial account. A licensed contractor needs to complete the work on your home in most cases.

  3. Counties in the United States have an interest in keeping homes in good shape, and many offer special programs to subsidize home renovation loans. Search for “home improvement program” or “home repair/renovation assistance” for your county to start investigating options. 

  4. Cash-out refinance: A mortgage refinancing option where you withdraw some equity as cash, increasing the balance of your mortgage.

  5. Home Equity Line of Credit: Similar to a credit card, a HELOC gives you access to a credit line you can draw on as the home remodeling bills come in.  You'll repay the lender in monthly payments with interest.

  6. Home equity sharing: An alternative to loans where an investment company offers a portion of your equity in upfront cash in exchange for a stake in your home’s potential value.

How do you get the Best Possible Financing Terms?

Interest rates

Getting the best terms on a home renovation loan often starts with your credit score. Home renovation loans can carry high APR rates, over 20% in some cases. A score of 680 or higher is much more likely to lead to a favorable rate. The lowest rates on the market may be in the range of 5.49-9.95%, while other financing options like home equity sharing don't have any monthly payments or interest. Compare loan rates against alternative financing options, including home equity financing, to find your best solution.

Another thing that could help you qualify for a low interest rate is a low debt-to-income (DTI) ratio; calculated by dividing your total monthly bills (mortgage, student loans, credit cards, etc.) by your total monthly income.  Traditional lenders ask you to pay back home financing loans in monthly payments, so the more wiggle room in your monthly budget, the more confident they'll be that you'll be able to make those payments on time.  

Leveraging a Home Value Investment

If your DTI ratio is higher than 36%, some homeowners opt to take out a Home Value Investment first and use the funds to pay down a significant portion of their debt, often seeing an immediate boost in their credit score.  A Home Value Investment isn't debt and doesn't sit on your credit report, so using it to pay off debt will reduce your DTI ratio.  With a reduced DTI ratio and an increased credit score, your cash-out refinance or HELOC application is much more likely to be approved with favorable terms.

Fast closing

Mortgage loans can take 30-45 days to close, and home renovation loans often follow a similar timetable, depending on the complexity of the request. Homeowners with remodeling jobs in mind may be interested in expediting this process.

The two most time-intensive parts of the financing application process are providing all required documentation to the lender and a home appraisal to determine your home's current value.

Regarding documentation, gathering the following in advance of applying should help you qualify quickly:

  1. Personal identification (a PDF of your driver's license or passport)

  2. 3-6 months of your most recent paystubs

  3. Tax returns from the prior two years

  4. Your most recent mortgage statements

  5. Your mortgage note (the document generated at closing)

  6. Your most recent HOA statement (if applicable)

  7. The declaration page of your homeowner's insurance

  8. 3-6 months of your recent bank statement(s)

To determine your home's value, many digital lending companies like Noah are beginning to use hybrid appraisals, which combine a home inspection from a qualified appraiser (either in-person or virtually) with an analysis of county records and recent comparable sales in your neighborhood.  This approach has the advantage of cutting down your application time considerably; Noah's application process can take as little as 15 days from financing estimate to cash-in-hand.

Renovation projects are often expensive and time-consuming, but the effort can be worth it to get the updated, beautiful home you’ve imagined. Make smart decisions about how to fund your remodeling vision, and you’ll set yourself up for a more enjoyable process.