Paying out of pocket for a bathroom renovation isn’t feasible for most people. According to Remodeling Magazine’s Cost vs. Value report for 2021, the national average for a bathroom remodel is $24,424.
Whether your bathroom is in desperate need of a remodel or a new master bath has always been your dream, it can be hard to feel like you’ll ever make it happen.
However, with the right financing option, your remodel can become a reality. In this short guide, we’ll cover 5 of the best financing methods for homeowners. No matter the scope of the project, you have options for a home renovation loan or financing!
Why Should You Finance Bathroom Remodeling?
A bathroom remodel loan might seem like a frivolous expense, but think of it as an investment. According to the National Association of the Remodeling Industry, homeowners can regain up to 50% of the cost, especially when the bath remodel is done well. Because of how much you can recoup, fixing the bathroom first before selling or reselling your home is necessary.
How to Finance a Bathroom Remodel
As a homeowner, you’ve developed equity in your home. By making regular payments, you’ve improved your credit score, showed your trustworthiness to potential lenders, and built up a reserve of capital that you can draw on to finance your goals (whether that means buying a vacation home or remodeling your bathroom).
The best way to leverage your equity depends on your income, assets, and overall financial health. If you have enough assets to use as collateral, you can apply for a secured loan. But if you don’t have collateral, there’s also an unsecured loan. Let’s first learn what those two types of loans are, and breakdown which bathroom remodel loan options fall under each:
As mentioned earlier, unsecured loans don’t need collateral. Instead, lenders approve loans based on the borrower’s creditworthiness. Below are the two types of unsecured loans:
Credit cards can provide a flexible pool of money to pay for your bathroom remodel. This might be an option for you if your estimated costs are on the lower end. For example, taking on a few extra hundred dollars of debt to replace your toilet and repaint your vanity is unlikely to impact your long-term financial health.
However, there are a few considerations to take into account when using credit cards to pay for this type of project:
- Application requirements – Do you have enough available credit on your existing cards to finance your remodel? Would putting the charges on your current card result in a high credit utilization? Rather than maxing out your cards, you might need to apply for more credit. Whether you’re eligible will depend on your score and other factors.
- High-interest rates – Unless you’re able to pay off your credit debt quickly, interest will accrue over time. The average interest rate in early 2021 was 20.29%. With numbers like those, you could end up paying back much more than you initially borrowed.
If you apply for a credit card that offers 0% introductory APR, there are options to get around the interest rates, but that lack of an interest rate will go away after a certain period. If you’re thinking about using a credit card for your bathroom renovation financing option, make sure to check all the numbers.
A personal loan is a broad term for a loan borrowed directly by an individual from a lending institution for personal reasons. This can be anything from paying bills to taking a vacation—or most importantly, bathroom renovations.
While personal loans come in all shapes and sizes, there are a few things to take into consideration:
- Interest – Interest rates can range anywhere from 10.3% to 32% depending on credit score, with an average of around 16%. The rate may be lower than a credit card, but it depends on your specific eligibility.
- Term – The length of time in which you’re expected to repay your loan can vary. Longer periods could mean lower payments but higher interest costs.
It’s also important to note that you have to meet a certain required credit score to be approved. If you’re struggling with bad credit, this may not be the option for you.
Whether you finance through credit card or personal loan, know that requirements are much stricter and the repayment term much shorter. You should only apply when you can maintain a good credit score, or you’re certain that you can pay the installments on time throughout the whole repayment term.
This loan requires the borrower to have some form of collateral. For financing a bathroom remodeling project, the borrower could use the home or the home equity. The three types of a secured loan are discussed further below:
Home Equity Loan or Line of Credit
As a homeowner, you already have one of the best assets out there—your home. Home equity financing uses your home’s equity—the difference between what your house is currently worth and what you owe on the loan—to provide the money that you need. In return, your house is used as collateral should you not pay back the amount borrowed.
Two common financing options use your home as collateral:
- Home equity loan – A loan taken out based on home equity, using your house as collateral. The amount is limited to around 85% of the equity available, but other factors such as credit score matter as well.
- Home equity line of credit (HELOC) – This loan is similar to a credit card but with a credit limit based on equity. It’s more flexible than a home equity loan in terms of how much money you borrow and when you borrow it.
However, as with all forms of loans and credit, things like credit score, interest, and the value of your home are all factors that have to be taken into consideration. Out of these two options, better pick the one with flexible financing options.
Refinancing involves exchanging your current home loan for a larger one, giving you access to some of the equity you’ve built.
While a refinance can also be used to potentially reduce interest rates on the mortgage overall, that is highly dependent on the current rates.
Another important factor to note is that refinancing will likely reset the time you’ll be paying on your loan. Before choosing this option, it’s crucial to know the different types of refinance options.
Most often, you’ll now have a bigger loan to be paid back over a new 30-year term. At the same time, you’ll benefit from a lower interest rate on the debt you take on to remodel your bathroom.
A sale-leaseback is another option that uses your greatest asset—your home—to your advantage. In short, you can sell your home to a buyer and then lease it back. This allows you to turn the equity in your home into cash that you can use on your bathroom renovation. Because of the similarities with a home equity loan, this financial scheme is considered a home equity loan alternative.
Several unique benefits of a sale-leaseback program include:
- Fewer restrictions (i.e,. credit score)
- No interest rate
- No borrowing
As an alternative form of home improvement financing, a sale-leaseback program can provide greater flexibility with fewer fees.
With a secured loan, the more valuable the collateral, the higher the amount you can borrow. The biggest risk is if you didn’t pay, the lender would seize the asset you cited as collateral.
A Sale-Leaseback Program: An Alternative Form of Bathroom Remodel Financing
If a sale-leaseback program sounds like the right option for your bathroom renovation financing, you can make your home’s equity work for you.
Whether you’re hoping to enjoy your new dream bathroom for years to come or profit from remodels by selling your home, a sale-leaseback solution can help you to achieve your goals.
With the right financing option, your remodel can become a reality. No matter the scope of the project, you have options for a home renovation loan or financing! If you are still unsure of alternative options to securing this specific loan, after reading this article, consult a financial advisor to discuss your options.
- Remodeling Magazine. 2021 Cost vs. Value Report. https://www.remodeling.hw.net/cost-vs-value/2021/.
- The Balance. Average Credit Card Interest Rate was 20.29% in March 2021. https://www.thebalance.com/average-credit-card-interest-rate-march-2021-5183902.
- Nerdwallet. Best 0% APR and Low Interest Credit Cards of August 2021. https://www.nerdwallet.com/best/credit-cards/low-interest.
- Bankrate. What’s the Average Personal Loan Interest Rate? https://www.bankrate.com/loans/personal-loans/average-personal-loan-rates/.
- Nerdwallet. Secured vs. Unsecured Loans: What’s the Difference? https://www.nerdwallet.com/article/loans/personal-loans/secured-vs-unsecured-loans.
- Nerdwallet. Best Home Improvement Loans of August 2021. https://www.nerdwallet.com/best/loans/personal-loans/personal-loans-home-improvement?trk=nw_gn_5.0.
- Federal Trade Commission. Home Equity Loans and Credit Lines. https://www.consumer.ftc.gov/articles/0227-home-equity-loans-and-credit-lines.
- Home Light. Bathroom Remodels Increase Home Value—Fact or Myth?
- Investopedia. Unsecured Loan Definition. https://www.investopedia.com/terms/u/unsecuredloan.asp