Your Main Options For Financing A Remodel

Remodel 1st Mortgage Cash-out Refinance

Depending on many factors 5-7% interest rate + closing costs.

Pros of mortgages are simple interest instead of compound interest like credit cards.  

They are secured by your home which reduces the banks risk and allows a lower interest rate.  Rates are still currently low which is great. 

Mortgage interest is also tax deductible.

Mortgages allow for a smaller monthly payment because they are spread out over a longer term.

Most mortgages don't have a prepayment penalty.

There is a mortgage program discussed below that offers a loan based on what your property will be worth AFTER the remodel is done! That allows you to borrow more unlike a HELOC mentioned below.

Cons are paperwork and processing can take time.  (We know a company mentioned below who does a great job helping with those two items)

Closing costs can be a downside to a mortgage.

You pay for the loan over a longer period of time which is why you have a lower monthly payment.

HELOC 2nd Mortgage

Closing costs + higher interest rates than a conventional mortgage and the rate can fluctuate. 

Pros of a home equity line of credit (HELOC) are it allows you to only pay on the amount you borrow. So if you only use 30k of the 50k available, you only pay on the 30k you borrowed.  

You can pay off and borrow from the HELOC whenever you want as long as it isn't at the max loan amount.

Cons of a HELOC are the interest rate can fluctuate often and increase your monthly payment.

Normally the monthly payment they require is only for interest so you aren't paying the loan down.  You have to pay extra and this tricks some homeowners.

Usually after 10 years it goes from a 30 year mortgage to a 20 year mortgage so any loan amount still on there gets a dramatic monthly payment increase.

Credit scores usually have to be excellent for a HELOC because of additional risk to banks.

You have to have a decent amount of equity in your home because HELOC are more risky being in the 2nd lien position compared to a regular mortgage.

Remodel Loan

Depends on the bank and  qualifying criteria but the rate is usually 4%-$15%

Pros to a remodel loan are that they are for a short period of time so you often pay less interest compared to a mortgage.

It is unsecured so you are not tying it to your home.

You get fast approvals.

Remodel loans are simple interest so the amount of interest is predetermined in the beginning. It doesn't pile up the way a credit card does from compound interest.

Cons to a remodel loan are the higher monthly payment since you are paying it off in a shorter amount of time. 

The interest rates are higher than a mortgage but they are paid off much faster so less interest.  (The remodel loan rates are less than most credit cards and it is simple interest which is better than being charged compound interest like a credit card)

Some of the best remodel loan terms require 720 or higher credit scores.

Credit Cards

No initial fee normally but compound interest rates of 10-25% Some credit cards offer 0% for 12-18 months.

The pros to credit cards are not secured to a home or other property.

You can also earn points.

If 0% credit card that can give you 12-18 months to pay off without any interest.  Some people will get a new 0% credit card a month before the other one is due and transfer the balance to give themselves another 12-18 months.

They are easy to apply for.

Cons to credit cards are remodel contractors get charged 3%-4% from their merchant account provider so you will get charged 3%-4% percent extra to cover the cost.

Credit cards are compound interest making it hard to pay off the balance.

Just like a loan, higher credit scores are needed for the best interest rates such as 0% card offers.

401k Loan

10% early withdrawal penalty and possible tax payments

Pros of a 401k loan are quick access to the funds.

Rates are usually pretty low, most are based on the prime rate +1%.

The interest you pay goes back into your 401k so it basically contributes to your plan.

Cons of a 401k loan are 10% early withdraw penalty which is quite hefty.

When you take money out that amount doesn't continue to earn interest.

You will most likely have to pay taxes twice - once on borrowing and once after retirement when drawing from the 401k.

Loan from family member

Hard to say but probably less than banks 

Pros to a loan from a family member are lower interest rates, more flexibility and easier access.

Cons to a loan from a family member in my opinion are mostly around the closeness of the relationship and emotions that can be involved in different situations.

Cash

Cheapest option on paper

Pros of paying cash is no need for paperwork.

No additional interest being charged.

The cons of cash is using your money when it could be "working for you".

If you invest the money and earn a higher rate that is also compound interest (good when you are earning it) and you are paying on a loan with a lower interest rate that is simple interest, you are actually making money from the loan.

Of course this assumes you are ok with the risk of the investments making a higher return than the cost of the loan. 

This is why some financing experts advise not paying your mortgage off even though it is a lot of interest over the life of the loan.  Essentially making a higher amount of interest plus it is compounding interest will make more money than paying off the mortgage faster.