With that in mind, know that there are a few different types of home improvement financing options for you to consider, each with its own unique benefits and disadvantages:

Cash-Out Refinance

A cash-out refinance allows you to take out a new mortgage for more than what you currently owe, so you can then pocket the difference to fund your renovations.

The biggest advantage of a cash-out refinance is that it typically offers a lower interest rate compared to other loans. In some cases, that interest may also be tax-deductible.

Unfortunately, cash-out refinances tend to have longer repayment terms than other options, and the closing costs can be high. They’re ideal for homeowners who are planning extensive renovations from the outset and would prefer one large sum to cover their costs.

Home Equity Line of Credit (HELOC)

A HELOC gives you access to a revolving line of credit that’s secured by your home’s equity, much like a credit card. You’ll benefit from flexible borrowing as needed and lower interest rates than personal loans.

However, these tend to have variable interest rates, which can lead to unpredictable payments. There’s also a risk of foreclosure if you’re unable to repay the loan.

HELOCs are best for projects requiring ongoing funding or when you want more flexibility in your borrowing amounts.

Home Equity Loans

A home equity loan provides a lump sum that’s secured by your home’s equity, payable over a fixed term with fixed interest.

The fixed monthly payments of home equity loans make budgeting much easier, and these also tend to have lower interest rates compared to unsecured loans.

The biggest drawback, of course, is the risk of foreclosure on your home if you default. Closing costs and fees may also apply, but these loans are great if you know exactly how much your project will cost upfront.

FHA 203(k) Loan

The FHA 203(k) loan combines the purchase of a home and renovation costs into a single mortgage guaranteed by the Federal Housing Administration.

With lower down payment requirements, these loans cover a wide array of renovations. However, mortgage insurance premiums may apply, and the loans have an extended application and approval process.

Nevertheless, they’re a good option for people who are buying a home for the first time or are purchasing fixer-uppers.

Fannie Mae HomeStyle Renovation Loan

This option allows you to include renovation costs in your mortgage, covering everything from minor repairs to major remodels. There’s extensive flexibility when it comes to eligible renovation types, and with competitive interest rates, you can’t go wrong with this kind of loan.

That said, they’re competitive, requiring good credit scores along with a detailed paperwork and approval process. If you’re a homebuyer with strong credit looking to finance renovations alongside your home purchase, look into a Fannie Mae HomeStyle Renovation loan.