How to Pay for a Home Project Without Overpaying for the Money

Three ways to pay for the same project

If you're buying or refinancing a home that needs work, there's a fourth option: an FHA 203(k) mortgage rolls the repair costs into the mortgage itself. HUD raised the limit on the Limited 203(k), meant for non-structural work, from $35,000 to $75,000 in 2024.

What a $25,000 project costs under each option

The secured loan wins on interest at the same term, but the table leaves out two things. First, home equity loans and HELOCs often carry upfront costs similar to a mortgage's, such as an origination fee and an appraisal, which shrink the savings on a smaller project. Second, the cheap rate tempts people into longer terms: the ten-year version has the lowest payment and the highest total interest of the four.

A HELOC isn't in the table because its payment moves. The rate is usually variable, and many HELOCs let you pay only interest during the draw period, so the payment can jump when repayment of principal begins. Run your own figures with the loan payment calculator.

FHA Title I: a federally insured option for low equity

Title I loans are made by FHA-approved private lenders and insured by the federal government, which is why they can work for owners who haven't built up much equity. The key limits:

• Up to $25,000 for a single-family house, and up to 20 years to repay.
• Up to $25,090 for a manufactured home on a permanent foundation, or $7,500 if it's classified as personal property.
• Up to $60,000 for a two- to four-unit building, capped at an average of $12,000 per unit.
• Loans over $7,500 must be secured by a recorded lien on the property; smaller loans need no collateral.

The money must go toward permanent improvements that make the home more livable or useful, such as repairs, accessibility changes like ramps or wider doors, or fire safety equipment. Luxury items like swimming pools and outdoor fireplaces don't qualify, and neither does work finished before you applied.

Borrowing against your house

A lower rate comes from the lender's right to your home. If you can't keep up, the lender can foreclose. That risk is easy to accept for a new roof and harder to justify for a remodel you could scale back. Compare the details in how a HELOC works and home equity loans.

• Right to cancel. For most home equity loans and HELOCs on your primary residence, federal law gives you until midnight of the third business day after signing to cancel, and the lender can't release funds until that period ends.
• Tax deduction. The IRS lets you deduct the interest only if the money is used to buy, build or substantially improve the home that secures the loan, within the $750,000 overall limit on mortgage debt. A renovation can qualify; paying off cards with the same loan does not.
• Balloon payments. Some HELOCs end with a large final payment that you may have to refinance.

Contractor financing and other traps

Many contractors offer to arrange financing on the spot. That can be convenient, but you're signing a loan you haven't compared, sometimes with a promotional rate that turns into deferred interest if the balance isn't paid in time. Ask for the APR, the lender's name and the total of payments, and compare it with at least one offer you found yourself.

• Sales made in your home of $25 or more are generally covered by the FTC's Cooling-Off Rule, which lets you cancel until midnight of the third business day. Repairs you asked for are an exception, so read before you sign.
• Don't pay most of the job upfront. Tie payments to finished stages of work, and keep the last payment until the job passes inspection.
• Ask about liens. If your contractor doesn't pay suppliers or subcontractors, they may be able to put a lien on your home. Ask for lien waivers as you pay.

Before you sign

1. 1 Get at least two written bids with materials, schedule and payment stages, and add a cushion for surprises before you set the loan amount.
2. 2 Decide on collateral. If you'd rather not risk the house, stay unsecured; read secured vs. unsecured loans for the trade-off.
3. 3 Compare APR and total cost for the same term, including closing costs on any equity product.
4. 4 Line up the money with the work. A HELOC fits a project paid in stages; a lump sum fits a fixed-price job. Then compare offers side by side.
5. 5 Check licenses for both the lender (NMLS Consumer Access) and the contractor (your state or city licensing office).

Common questions