Five ways to get home improvement funds

Homeowners have been bitten hard by the remodeling bug. For proof, consider that over 50 percent of those recently polled by Houzz indicated they plan to start or continue home improvement projects in the next 12 months.

What's more, Metrostudy reported that its second quarter 2018 Residential Remodeling Index hit an all-time new peak of 114.4, which was 5.2 percent higher than a year earlier.

Yet 30 percent of folks surveyed by Harris and LightStream earlier this year said they plan to use plastic to pay for some of their home renovations; keep in mind that some credit cards carry interest rates in the 18 percent-plus range, making them a terrible means of funding a fix-it project if you carry a balance.

So, what's a better option? The experts weigh in on these five safer financing choices:

• A cash-out refinance.

Refinancing your mortgage and taking extra cash out at closing — money that can be devoted to remodeling dollars — can be a wise decision, under the right circumstances.

“If you can refinance to a lower fixed interest rate or a shorter term, that's a win for your finances,” says Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate Mortgage, based in Santa Rosa, California.

Note, however, that you'll pay closing costs that can add up to thousands (unless you roll these fees into your loan in the form of a higher interest rate); this process can also take weeks to complete, but this is the best way to secure a fixed rate and one loan.

• A home-equity loan.

This option, often referred to as a “second mortgage,” enables you to borrow against equity you've accumulated in your property. The interest rate is typically fixed, the funds are paid out in one lump sum, and the repayment term can range from five to 30 years.

“Say you have a lot of home equity, and the renovation project is long-term with a high return on investment. In that case, tapping some of that equity to invest back into your house without expending your savings could prove a smart way to go,” Byron Ellis, certified financial planner with United Capital Financial Life Management in The Woodlands, Texas, says.

• A home equity line of credit (HELOC).

This route also allows you to borrow against your home's equity. But you get to choose when to withdraw the cash, up to a preapproved limit and over a specified period. The interest rate is variable based on current prime rates, and many HELOCs don't charge closing costs.

“A HELOC often has a very low introductory rate, and you are only charged interest on the amount you borrow,” notes Randall Yates, CEO of The Lenders Network, headquartered in Dallas.

• An FHA 203(k) rehab loan.

This option is only available when you first buy a home or refinance, the lender must be FHA-approved, and it's applicable for older homes and fixer-uppers. But it simplifies the borrowing process because it rolls your mortgage and rehab funds into one loan. And FHA requirements are less strict — for example, a low 3.5 percent down payment may apply, and a 620 credit score may qualify you.

“If your home currently doesn't have a lot of equity, an FHA 203(k) loan is the way to go, as you can borrow money based off the estimated value once the home is finished,” Beeston notes.

• A personal unsecured loan.

The good news here is that your home isn't used as collateral for the loan, and the process occurs much quicker. The bad news is that the interest rate can be much higher than options No. 1 through 4.

“This can make sense if you are fixing up the house to sell immediately. But you need to read the terms and conditions carefully. Some private lenders, for instance, may want you to pay the whole amount back in three months, while others may give you three years,” says Beeston.

Yates adds that a personal loan “may work well for someone with a commission job where their income fluctuates. If you face any financial issues, at least you don't risk losing your home.”

Before committing to any financing vehicle, “research all options available to you carefully. Rates and fees will vary from lender to lender, so compare loan offers from at least three lenders to make sure you're getting the best deal,” says Yates.