1. Zero percent or low-interest credit cards
If you have decent credit, you likely get offers for zero percent interest credit cards (new credit cards or checks you can use with cards you already have). Credit Karma advises that these credit card offers are best for projects under $15,000, because it’s easier to pay off the loan within the low-interest-rate offer timeline (usually 12 to 18 months). Typically, these offers are easy to qualify for, and your home isn’t used as collateral.
Make sure you can fully pay off the debt by the time the offer expires, or you’ll end up owing a ton of interest on the full amount.
2. Personal or unsecured loans
For projects from $15,000 to $50,000, Credit Karma recommends personal or unsecured loans. These loans are easy to apply for, don’t require any collateral, and tend to offer higher loan amounts than credit cards.
However, interest rates are typically higher on personal and unsecured loans than they are on home equity or home equity line of credit (HELOC) loans. Compare the terms, APR (annual percentage rate), and other costs of each loan to see which one makes the most sense.
Using your home as collateral
If you have equity in your home and projects costing $50,000 or more, it’s best to use loans tied to your property. To reduce risk, lenders limit the amount of loans on your home to about 85 percent of your home’s value. Even so, it’s easy to borrow more money than you can handle and end up owing more than your home is worth. Here are the most popular options.
1. Cash-out refinance
A cash-out makes sense in some scenarios—especially if your mortgage rate is much higher than current rates. You’ll replace your current mortgage with a new one and take cash out for improvements. The long repayment period is nice, and monthly payments are lower than with a home equity loan or line of credit.
However, closing costs may be high, and your APR will be higher than if you refinanced without getting cash out. Also, you’ll owe more on your mortgage. If you’re 10 years into your 30-year fixed mortgage and refinance into a bigger 30-year loan, the clock restarts.
2. Home equity loans (HEL)
Home equity loans are a second mortgage on your home. They’re usually a fixed interest rate, and you get the money in one lump sum. Terms vary, but many home equity loans have you pay back the principal and interest within 15 years. This is a good option if you need a set amount and have the ability to make the payments.
However, home equity loans can be pricey, with closing costs similar to those of a primary mortgage. There might also be a penalty if you pay off the loan early.
3. Home equity line of credit (HELOC)
Instead of giving you all the money you qualify for at once, a HELOC gives you a revolving open credit line. That way you can borrow money periodically. Terms vary, but many HELOCs give you 5 to 10 years to access the credit line, during which time you pay interest on what you borrow, and give you 15 or so years to pay it back in full.
HELOCs, however, are adjustable rate mortgages, however, so rates can fluctuate and end up much higher than with a fixed home equity loan. But there are usually no closing costs on HELOCs.
Tip: If you have the cash, consider paying by credit card anyway to get the rewards (cash back, airline miles, etc.)