Smaller homes are becoming more popular due to the housing bust of the previous decade. There are lots of reasons smaller homes are popular; lower utility costs, more bang for your buck, and less up-keep. Another benefit to smaller homes, besides the price point, is that renovating can cost less than purchasing a larger or nicer home to begin with. In a perfect world, people would save up their money before renovating their home, but in our imperfect world, renovations are often needed before the funds have accumulated in our bank accounts. Financing a renovation isn’t nearly as scary as it seems. Most banks offer a variety of loans that suit your needs or you may want to investigate alternative ways to finance your home renovation. Four popular ways to finance a home renovation include:

  1. Home Improvement Loans or lines of credit – Depending on when you purchased your home or how much equity you have accrued, applying for a home improvement loan or taking out a loan against your equity could help finance a renovation. Before the housing boom, most equity loans were meant for just that; home improvement. (Unfortunately, during the housing boom people took out HELOC’s for more surreptitious reasons). Depending on the kind of renovation your home needs, the return on investment could be worth the cost.
  2. Personal Loans – In today’s housing market, many people may not have enough equity in their home to qualify for a HELOC (Home Equity Line of Credit). But that doesn’t mean the renovation has to be put off, instead you may qualify for a personal loan. Of course, your credit score will determine your amount and interest rate.  Since personal loans are traditionally granted at a higher interest rate than HELOC’s, you may want to weigh the benefits and costs against whether the renovation is a “need” or a “want” before taking on this kind of debt.
  3. Peer-to-peer lending (P2P) – A terrific option for people looking for smaller amounts of credit and the ability to shop for a lower interest rate. Peer-to-peer lending rates depend on credit scores – the better your score the better your interest rate and larger your line of credit, but if you’re looking for a smaller loan amount, this is definitely an option to weigh against the others. Peer-to-peer loans are funded through multiple individuals who make a profit lending money to others. P2P lending also lets the borrower “shop” for the best rates as more than one option will be presented to the person accepting the loan.
  4. Alternative options: federal grants and borrowing from a retirement account – Of course, there are alternatives to traditional lending options and HELOC’s. If your house qualifies as a historic building or you meet certain requirements, a federal grant might be an inexpensive way to fund a home renovation. Grants are federal funds that do not need to be paid back, but there may be certain requirements that must be met before the grant is considered “free money”. Another option is borrowing against a retirement account. Fees and penalties will apply and you will again want to weigh the pros and cons of the renovations against the cost of the loan, but if you don’t qualify for any of the above and your home renovation is a “must do”, this option could provide the needed funding.

Recently, I’ve been researching homes for sale in the Sacramento area. The homes in the downtown area are older, have more character, and are more along the lines of what I’m looking for; craftsman style bungalows and Victorian walk-ups. Though many families can’t imagine themselves living in a space under 1,500 square feet, the prices on these homes can’t be beat. A couple of the homes that are incredibly beautiful inside and located right in the heart of downtown, are on the smaller-side, even for me. But with a little renovation, opening up the attic and converting to a loft or adding on a room, it could work for our growing needs – and cost a whole lot less than taking on a McMansion.

Have you been thinking of  renovating your home? How will you fund your renovation?