Interest rates have reached levels not seen in years, posing challenges not only for home purchases but also for home renovation financing, which many homeowners are now choosing instead of moving to a new home. But interest rates are high for construction projects, too, so how can you lower borrowing costs?
Loan choices for home renovation financing
The primary sources of home renovation financing for most homeowners are home equity loans or home equity lines of credit. Both use the homeowner’s equity stake in the property as collateral for the loan. Interest rates, even for a person with good credit, can run near 7%, whereas the homeowner’s original mortgage could be at half that rate. Other loan sources include:
- Personal loans are typically unsecured, meaning neither the home nor the borrower’s financial assets are used as collateral. This results in a higher interest rate and a shorter repayment term. You must also watch out for origination fees and prepayment penalties.
- Borrowers with excellent credit profiles can use peer-to-peer platforms such as Lending Club and Prosper, which offer competitive rates, faster approval times, and flexible terms.
- Cash-out financing replaces your entire mortgage and provides an additional amount you can use for remodeling or other purposes. You end up with a new mortgage that includes the original balance plus the addition. Rates are comparable to other mortgage products.
- The least attractive source of funding is a credit card loan, which is easy to access but can carry a punishing annual interest rate of 20% or more.
What to expect in the financing process
Today’s high-interest-rate environment means lenders are more stringent in their loan approval process. Do your due diligence to shop for the best rates and terms, and make sure you pay existing debt obligations on time.
Related – Pay Back Time: Which Home Renovations Are Worthwhile?

