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How to Budget for Home Upgrades

Home improvement costs can add up quickly. Here’s how to build a budget for them, and how to explore home improvement loan options.

May 3, 2022

If you own your home, chances are you have a few improvement projects in mind. 

Maybe the master bathroom could use a refresh, or the kitchen counters need to be replaced. Maybe the bedrooms could use new carpeting, or the living room could benefit from a new couch. 

Whatever the project or purchase might be, chances are, it’s going to be pricey. A typical bathroom remodel runs $10,000+ on average, and new kitchen appliances might set you back $2,000 or more.

Because home upgrades can be expensive, many homeowners choose to finance them. This guide discusses how to get a home improvement loan — and whether that’s a good idea. 

How to budget for home upgrades

There are two ways to pay for home upgrades:

  • Out-of-pocket using savings

  • Using a loan, credit card, or line of credit

Depending on which method you choose, the way you budget for these expenses will differ. 

Budgeting for out-of-pocket expenses

If you’re paying out-of-pocket, you’ll need to wait until you can save up enough to cover the expenses. This would likely require you to adjust your monthly budget by reallocating some funds from optional expenditures — like dining out our entertainment — to short-term savings for your home improvement expenses. 

Another option is to shift priorities from other financial goals. For example, you may be saving for a vacation or a new vehicle. You could choose to shift some savings from these goals toward your new home upgrade goal. Just be sure to carefully consider what goal is more important to you. 

Budgeting for financed expenses

If you opt to use financing to pay for home upgrades, you can potentially make those upgrades sooner. However, you’ll pay significantly more in the long run due to interest. 

Budgeting for a new loan or increased payments on existing loans works a bit differently. You likely won’t need to save money upfront, but you’ll need to ensure you’ve enough room in your budget moving forward to cover the monthly payments. 

For example, if you open a HELOC (home equity line of credit) and take out $20,000 for home improvement costs, that could equal anywhere from $100 to $400 in monthly payments, depending on the loan term and APR. 

When shopping for a loan, consider what your future monthly payments will be — and if they are workable for your current budget.

Finally, evaluate the total cost of the loan. A 10-year, $20,000 loan at 6% interest would result in $6,644.92 of total interest costs. That means in the end, you’d pay a total of $26,644.92, even though you only “spent” $20,000. 

How to get a home improvement loan

If you do decide to finance your home projects, you may be wondering how to get a home improvement loan. Here’s the basic process:

  1. Choose the type of loan you want (see below)

  2. Choose the lender (look for competitive rates and a good reputation. You could use your existing bank/credit union, or shop around)

  3. Submit the required application and supporting documents

  4. Wait for approval

  5. Use the loan funds to pay for your desired projects

  6. Make a plan to pay the required monthly payments (and be aware of total loan costs, including interest)

The biggest part of how to get a home improvement loan is figuring out which type makes the most sense. Here’s an overview.

Types of home improvement loans

Home equity line of credit (HELOC)

A HELOC is available for homeowners who’ve sufficient equity built up in their homes. HELOCs are a type of revolving line of credit, similar to a credit card. You are approved for up to a certain amount and can draw on that loan limit as needed; instead of borrowing a set amount, HELOCs allow you to borrow up to a certain loan limit. They are similar to credit cards but tend to have much lower interest rates. 

Home equity loan

A standard home equity loan is a fixed loan amount that you borrow against the equity in your home. For example, if you have $100,000 of equity in your home, your bank may allow you to borrow $20,000. These loans tend to have fixed interest rates. 

Personal loan

Personal loans are unsecured loans that you can take advantage of if you have good credit. “Unsecured” means that these loans aren’t backed by anything (unlike a HELOC, which is backed by your home equity). Because they are unsecured, personal loans have higher interest rates — but they may still be cheaper than credit cards. 

Credit cards

Credit cards should typically be a last resort when it comes to financing home upgrades. Credit card APR is very high, so adding credit card debt can be very costly. Only use a credit card for home improvement projects if they are essential, and if you don’t have any other financing options. 

If you do choose to finance your home upgrades, make sure to have a plan to pay off the loans. You don’t want to end up with excessive debt holding you back from your financial goals. 

If you have existing high-interest debt, it’s wise to prioritize paying it off as soon as possible.

For credit card debt, Tally† might be able to help. Tally is a personal finance app that helps qualifying Americans apply to consolidate credit card balances to a lower-interest line of credit. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.