Thrifty Thinking: Home Renovation Financing

The GetHearth.com Home Renovation Survey recently found that 12% of Americans prefer to finance home renovations with a credit card—one of the riskiest and most expensive ways to finance.

To conduct the GetHearth.com Home Renovation Survey, the data scientists at Hearth—a financial technology startup that helps homeowners make smart renovation decisions—asked 2,000 American homeowners about their remodeling plans and habits for the upcoming year. 

>> 12% OF AMERICAN HOMEOWNERS FINANCE RENOVATIONS WITH A CREDIT CARD
62% say their preferred renovation financing method is with savings or cash. Alarmingly, 12% say they’re most likely to use a credit card. Another 26% prefer financing with a loan.

>> 1 IN 3 AMERICAN HOMEOWNERS WORRY THEY WON'T BE ABLE TO AFFORD RENOVATIONS
29% say their biggest maintenance concern is not having enough money to finance home projects. Another 25% are concerned they won’t be able to fix necessary things in their home, while 19% are worried about not being able to get to the renovation projects they’d like.

>> 15% OF AMERICAN HOMEOWNERS NEVER BORROW MONEY
When asked how they prefer to borrow money when they need it, 28% of American homeowners said they usually opt for bank loans. 17% prefer to borrow from credit unions, 15% take out personal loans, 12% borrow from family, 11% use credit cards, 1% use peer-lending providers, and 15% never borrow.

I had a chance to conduct an interview to learn more.

1. Why do so many homeowners use a credit card for renovations?

Many homeowners, especially younger ones, don’t have the cash to pay for their projects, especially if their renovation is unexpected or urgent. These homeowners also may not have enough home equity for a secured loan. These factors, coupled with a lack of awareness about alternatives, drive homeowners toward credit cards, which tend to seem convenient (it's so easy to just swipe away thousands of dollars). Homeowners are also attracted to the idea of racking up credit card points, but these points can be offset if contractors charge credit card processing fees that can go as high as 4-5%.

2. What are some better options for financing a home remodel?

There’s no one right option for financing a project. I encourage you to look at our comprehensive guide on home improvement loans (https://www.gethearth.com/learn/guides/home-improvement-loans). The guide, written with input from personal finance experts, walks homeowners through the main financing options and describes their trade-offs.

Many homeowners who use a credit card for their renovations would benefit from a personal loan (https://www.gethearth.com/loans). Like credit cards, personal loans can get homeowners cash as soon as a day after they apply. Rates are often 3-5% percentage points lower than those on credit cards, there’s no need to risk a home as collateral, and payments are fixed each month. Fixed monthly payments prevent homeowners from falling into compounding debt, a major risk of not paying off a credit card quickly.

3. How can home buyers make sure they're maximizing value without sacrificing quality?

The key is to plan early. By crafting a detailed budget that ties together financing, materials, labor, and other costs, homeowners can see trade-offs. By acting early, this process gives homeowners time to find cheaper ways to accomplish the same goals. There are plenty of resources out there to help homeowners get creative!