Revolving Line of Credit: How to Pay for Home Renovations

Home renovations can be expensive. On average, home renovations cost around $15 to $60 per square foot. 

If you’re remodeling a 2,000-square-foot home, that’s between $30,000 and $120,000. Even if you’re just remodeling a 300-square-foot kitchen, you might expect to spend between $4,500 and $18,000 or more. 

Most of us don’t have that kind of money on hand to spend. If you’re wondering how to pay for home renovations, start here. We’ll discuss using revolving credit — like HELOCs, credit cards and more to fund your renovations. 

What is a revolving line of credit? 

Revolving credit is a credit or loan product that allows you to continually borrow and pay back money. 

The most common example of revolving debt is a credit card. When you open a credit card, you get a credit limit. That means that you can carry a balance of up to the limit on that credit card. 

Each time you make a purchase, available credit reduces. Each time you post a payment, available credit increases 

Essentially, revolving credit can go in an endless loop. You can continue using the card, paying off balances, making new purchases, and so on. 

The other main type of loan is an installment loan. Installment loans are the more traditional structure of loans: You borrow a certain amount of money and then pay it back in monthly installments. Examples include:

• Mortgages

• Auto loans

• Personal loans 

How to pay for home renovations

When it comes to figuring out how to pay for home renovations, broadly speaking, you have two options:

• Paying cash out of pocket using savings 

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

Paying out of pocket will be the most cost-effective, as you won’t have to pay any interest. It also avoids adding debt. 

However, most of us don’t want to wait years, or can’t wait, until we can save up enough cash to pay for major renovations or repairs, which leaves us with the next best option: Using a loan or line of credit. 

Using revolving credit to pay for renovations

The specifics of how to pay for home repairs depend on:

• The scope of the project

• The loan products available to you 

• Your credit rating

Here’s an overview of some options for revolving credit products. 

Home equity line of credit (HELOC)

A home equity line of credit often referred to as a HELOC, is a revolving line of credit that converts equity in your home into accessible cash for you.

For example, if you own a $400,000 home and have $250,000 remaining on your mortgage, you have $150,000 in equity built up in your home. This means you own $150,000 of your home outright.

A HELOC allows you to borrow money against a portion of this equity. The equity serves as the collateral which secures the loan. The bank loans you money, which you can use for any purpose, and pay back over time. 

HELOCs are a good option for those with equity built up in their home. Because the loan is secured, HELOCs typically offer better interest rates than many alternatives. Since it’s a revolving line of credit, a HELOC is flexible in how much you borrow — and when. 

Drawbacks of HELOCs include:

• Annual fees

• Variable interest rates can change over time

• Your home is used as collateral. If you default on a HELOC, you could lose your home to foreclosure. 

Line of credit (LOC)

A revolving line of credit is similar to a HELOC, except that a line of credit is typically unsecured. There’s no collateral put up against the loan — instead, the loan is issued based on your creditworthiness. 

A line of credit works like a credit card. You apply, and if approved, you get access to a certain amount of money. You can then choose how and when to use it. You’re only charged interest on the amount you take out, not the amount you could borrow. 

The advantages of a revolving line of credit include: 

• The flexibility they offer

• There’s no collateral (so you can’t lose your property) 

• You don’t need home equity to take out this loan type. 

Downsides include:

• Higher interest rates (compared to HELOCs)

• Difficulty getting approved for this loan type

In general, an applicant needs good to excellent credit to be approved for an unsecured line of credit. 

Credit cards

Credit cards are a familiar concept for most. You open a card and can use that card for purchases up to a certain maximum credit limit. Then, pay off the card in full each month, or carry a balance (and pay interest).

In general, credit cards should be a last resort for home improvements. Credit card APRs are very high, so this is a very expensive form of debt to rack up. One exception could be if you have access to a card with a low to no introductory interest rate. Or, if you’re making minor repairs that won’t cost much, credit cards could be a viable option. 

Wrapping up

The decision of how to pay for home renovations depends on several factors, including:

• The size and cost of the project

• Your credit score

• How much equity you have in your home

• The loan products available

In many cases, HELOCs are the most cost-effective option. But remember, you need to have substantial equity built up in your home before you can be approved for a HELOC. 

In general, try to avoid using credit cards and other forms of high-interest debt. These debt products can be a slippery slope that can be very costly. 

If you have existing credit card debt, consider focusing on paying that off before making any optional home renovations.

Tally† might be able to help. Tally is a credit card debt that helps qualifying Americans pay off credit card balances faster. 

†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.