Home improvement and renovation projects are very expensive. However, that doesn’t mean you need to get the cash out yourself- you can use a loan to cover the cost. Then, pay it back over time.

That way, you can still go through with the home renovation project, even if you don’t have the money right now. There are many options, so you’ll want to choose the loan that makes the most sense. Here’s what you need to know!

1. Cash-Out Refinance Loan

One of the best options for most people is to use a VA cash-out refinance. This loan is good when you already have a home and have enough time to build up some equity in it first.

The loan works by allowing you to refinance with a new mortgage for more than what you currently owe. You pay off the old mortgage and keep the cash. These VA loans usually have better interest rates and terms than the old loan, so you get more benefits with this method.

The funds you can from the refinance, you can spend on anything you want. Many families use this strategy to pay for their home improvements. 

Overall, a cash-out can help you pay for the remodel. You can receive a loan for up to 100% of your house’s appraisal value if you qualify.

Cash-Out Refinance Guidelines

However, there are several conditions that you’ll need to meet to qualify for a VA cash-out loan. According to The Mortgage Reports, these guidelines include the following:

  • A credit score of at least 580 to 620
  • Stable employment
  • Stable income
  • A DTI under 41%
  • A good amount of home equity

You’ll want to make sure you’re eligible first. To do this, you’ll need to obtain a Certificate of Eligibility before applying for the cash-out loan.

2. Home Equity Loan (HEL)

A home equity loan (HEL) is another option for many people. You borrow against your home’s equity with this loan, which you determine by assessing the home’s value. Then, you subtract the remaining balance on your current mortgage.

While it sounds like a cash-out refinance, the two are different. The HEL doesn’t pay off your current mortgage loan, while the cash-out refinance does. This feature makes the two work in extremely different ways.

So, you’ll need to continue paying your current mortgage monthly- on top of the new payments from the HEL. While that doesn’t sound good initially, it’s still a decent option for many people. 

When To Use a HEL

You’ll want to use this type of loan only when you have a good amount of equity already in your home. It’ll help you get the money you need for a big project.

You’ll receive low fixed interest rates, so you won’t have to worry as much about getting a large loan. However, it acts as a second mortgage, so you must ensure you don’t take out more than you can easily pay back.

If you want your money in a single payment, it’s a good option.

3. FHA 203(k) Home Improvement Loan

Next, you may want to consider an FHA 203(k) home improvement loan, which many often call the FHA 203(k) rehab loan. This option combines your mortgage and renovation costs into a single loan.

So, you won’t have to pay two different bills each month. Instead, your mortgage includes the cost of the home and the improvements you made. It’s the best choice when you’re looking for homes and want to buy a fixer-upper.

This loan also offers special benefits because our government backs it. For instance, you won’t have to pay a high down payment, and you can apply even if you don’t have the best credit.

When To Use FHA 203(k)

You’ll want to know when to use this type of loan. They’re only useful when you’re buying a house and you already know it will need quite a few repairs. Other than that, the loan won’t work for you.

You’ll also need to pay at least $5,000 for repairs, and the money can only go into your home repair project. While it’s a great option, you won’t want to take it out unless you’re looking into buying a home that needs repairs. So, it’s not for everyone.

4. Home Equity Line of Credit (HELOC)

Next, you can pay for your repairs and improvements using a home equity line of credit (HELOC). These types of loans work more like credit cards. You borrow, pay the debt back, and can borrow again. There’s also a pre-approved limit for you to consider.

Like many other home improvement loans, you borrow against your house’s equity.

However, these interest rates are flexible- they won’t stay the same forever. While this makes some people nervous, you won’t have to take out as much to complete the project at a time. Instead, break it up into smaller amounts, pay it back, then borrow when you’re ready to move on to the next step of your renovation plan. 

When To Use HELOC 

You’ll want to use HELOC if you have fewer repairs to make or if you don’t expect them to cost as much. You’ll also want to ensure your credit score is good since it can impact the amount you’re allowed to borrow.

Once the term of the loan ends, you must make sure you have paid the HELOC off. The lender can also change the terms of the loan for the amount of time it’s active. However, these loans offer a lot of flexibility.

You won’t need to draw out money unless you need it, and you don’t need to take out more than you plan on using for the repairs.

Choose a Loan That Works the Best For You

Each of these loans works the best in different situations. You’ll want to make sure you choose the one that will suit all of your needs. Think about why you need the loan and the circumstances behind it. That way, you can choose the correct option from the above list.