First, you must have a really good idea of exactly how much money you are going to need.

Most improvement projects cost 2 to 3 times what you would think! Make sure your material costs are broken down and verified. I hear from people all the time that ran out of money and still have a half-finished project.

Next, ask yourself how long you plan to have this loan.

Most of the time, doing needed home improvements is part of a bigger plan to keep a home longer than 5 years. If that is the case, a new 1st mortgage is typically the best option, especially if you need to borrow more than $50,000. This will allow you to lock in a fixed interest rate with the lowest overall monthly payment.

If you are thinking you will only have the loan for a short period of time, a home equity line of credit may be the best way to go.

While they do have adjustable rates that can go as high as 18%, most HELOCs have no fees and are a great way to go on smaller loan amounts. A HELOC will also let you borrow up to 100% of a home’s value.
This can be especially useful if you just closed on a home that needs some work, allowing you to borrow back your down payment to spruce it up.

For bigger more expensive projects, you may need to consider a loan that uses the completed value to get the money you need.

Once you have obtained plans and permits, the lender appraises the home as if the work was already done. This lets you access more cash at the lowest, fixed interest rates.