Tale of a Home Renovation: Financing Your Project

Renovation work costs money. Good renovation work costs good money. So, where do you get the money to do the renovation? If you are like my neighbor, you can finance it out of your inheritance. For the rest of us there are other options, albeit limited. Talk to your tax professional or financial advisor concerning your particular circumstances. Now is the time to clean up your credit report, too.

Identify all possible sources to pull funding from. You could raid your savings account. Let's have a show of hands here. How many of you were smart enough years ago to start setting aside money for a future home renovation? Hmm, I only need one set of fingers to count the raised hands. Forget about using the equity in your house. That Titanic is not coming back.

Another option is to get an installment loan from a financial institution. Banks, mortgage companies, and credit unions are in the lending business. If it is an unsecured loan, the interest rate may be high. You will probably have better luck with a financial institution where you have multiple accounts, instead of a checking account here, a savings account there, an IRA over yonder, and credit cards elsewhere. You also have the option to finance your project with your credit cards, but today's credit card interest rates make the idea less attractive.

Another option is to get a relative to help you out. This is a very difficult area though, and only you can decide if this makes sense for your situation. Make sure to get everything in writing and consult your tax professional to avoid getting improperly taxed as a gift. If there is a repayment schedule, make sure you can afford it. One good thing is, most likely no financial institution will allow a relative to co-sign a home improvement loan for you.

When I financed my 1994 dormer, I took out a construction loan. My monthly mortgage payments were suspended for the duration of the loan, in my case six months. After that period, I restarted my mortgage payments at a lower APR.

Your home renovation will most likely include energy efficiency upgrades. Nearly every state has some type of homeowner low interest loan programs to finance home energy efficiency upgrades. Here is a link to the Database of State Incentives for Renewables & Efficiency (DSIRE) so you can find out what your state offers.

Here in Michigan, we have a program called MichiganSaves to finance these types of upgrades. They will loan qualified homeowners in their principal residence up to $20,000 at 6.99% APR payable over 10-20 years.  It is an unsecured loan that is negotiated over the phone. Credit scores count!  You can finance insulation, heating, cooling, water heating, air sealing and windows. Nearly every utility company has some type of rebate program for energy efficiency upgrades on the same items listed above. Good contractors will easily separate these costs from ineligible costs and assist you to properly file rebate forms.

Using a combination of these resources may be your best bet and is most common among homeowners, including me. For this project, I'm raiding my savings account, partially funding it through MichiganSaves, and some judicious use of 0% introductory rates on new credit cards.

The lesson here is: there are many different ways to finance a home improvement project. Just like finding a builder, you need to use diligence here too. Be creative as well!