A kitchen remodel that is part of a home improvement project

Whether you're building a new deck, buffing up a bathroom, or adding a whole new wing to your house, figuring out how to finance a home improvement project should be as much a part of your decision-making as picking out countertops, flooring, and paint colors. 

If your savings won't go far enough to cover the cost of the project, you'll need to look at various financing options. Here are some considerations.

First Step: Determine Whether It's Worth It

Before you decide what kind of financing to pursue, make sure the project makes financial sense, says Joel Cundick, a certified financial planner at Savant Capital Management, based in McLean, Va. 

Many of Cundick's clients have approached him with ideas to improve a space for income purposes—say, by adding a small kitchen in the basement where they already have a bedroom and bath they rent out.

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"They may have been renting the bedroom and bath for $500 a month and think they can get $1,200 by adding a kitchen," he explains. "But is that $700 of extra monthly income worth $30,000 to do the project?" 

What you need to consider is how much of that $700 would have to go to paying off the debt you incur for the project, and for how long. When people realize they may not see any benefit to their income for years to come, Cundick notes, his clients often reconsider their plans. 

Of course, making additions to a home can also increase its value, though don't expect to make back your outlay in resale.

Though adding attic insulation, at an average cost of $1,343 nationwide, recoups 107 percent of its value in resale, a minor kitchen remodel, averaging $20,830, recoups just 80 percent, according to Remodeling magazine. And adding a bathroom, averaging $43,232, recovers about only half of its cost. 

Look Into Home Equity

Once you've determined you're ready to go forward—and have negotiated a good price with a contractor—check out financing options. If you have 25 percent or more in home equity, consider borrowing off your home. Typically, banks won't let you borrow off your home unless you have at least 20 percent in home equity. You have a couple of options:

• Home equity line of credit (HELOC). This is a revolving line of credit, like a credit card. In the beginning, you're only responsible for paying interest monthly; in the later years, you need to begin to pay back principal. A benefit of this type of debt is that you don't have to take out all the money at once for a project; you can draw gradually, as needed. After that initial "draw period," the HELOC converts to a fixed loan, and you'll have to pay back the principal on a set schedule. 

HELOC interest rates can go up and down; they're typically pegged to banks' prime rate, which is in turn connected to the Federal Reserve's short-term federal funds rate. With the Fed signaling its intention to raise its rates, expect HELOC interest rates to rise a bit this year. Still, they are historically quite low.

A $30,000 HELOC has an average annual percentage rate of 5.72 percent nationwide, according to Bankrate.com, but you can easily find lenders with significantly lower rates. Third Federal Savings and Loan of Cleveland, for instance, is offering a 3.99 percent APR HELOC for borrowers with excellent credit—that is, FICO scores of 750 and above. 

If this loan is your preference, shop around for HELOCs with generous draw periods—say, 12 to 15 years rather than 10 years. Make sure, too, that you get an accounting of all fees, including annual maintenance fees. 

• Home equity loan. These fixed loans usually have higher interest rates than HELOCs, but not always. In fact, currently Bankrate is showing home equity loans at a somewhat lower interest rate than HELOCs: 5.60 percent nationally, compared with 5.72 percent for HELOCs. 

Greg McBride, chief financial analyst at Bankrate, says that disparity has to do with the fact that home equity loan rates are pegged to longer-term interest rate indices while HELOCs are pegged to short-term rates. "Right now longer-term rates aren't rising as fast as short-term rates," he explains. 

Still, home equity loan closing costs—typically from 2 to 5 percent of the loan—could still make this type of debt more costly than HELOCs. So be sure you compare loans for all origination and other fees before you decide which type of loan to get, and which lender to use. You can compare costs of three loans at a time using this free calculator.

The tax benefits from borrowing off your home aren't what they used to be, but for some people they still may be worthwhile.

Under the new tax law passed last year, you can deduct interest on up to $750,000 of total home debt used to buy, build, or improve your home. So if you have a $450,000 mortgage and take out a $200,000 loan for a major home renovation, you'll still be able to deduct all your mortgage and home loan interest.

But with the standard deduction nearly doubling for 2018, many people will no longer be itemizing their federal taxes, which makes this tax break less valuable for many.

Cundick offers another caveat: People without a lot of home equity should save up a significant emergency fund—at least enough to cover three to six months of living expenses—before opening a home equity loan or HELOC for a home improvement. 

"If you don't have an emergency fund, you can tap home equity you've built in the event of an emergency," he explains. "But if you use that home equity to do a home improvement, you’re shutting the door to that emergency resource."

Borrowing off your home—and using it as collateral—also could have serious repercussions if its value were to drop precipitously, as it did for many homeowners 10 years ago during the Great Recession. Though stricter lending rules have made that less of an issue, it's wise not to overborrow, Cundick adds. 

Ask Your Contractor for a Loan

Your home contractor may offer a loan for, say, 12 to 18 months. Typically this is done through a third-party lender. For example, LendKey, a website that provides contractor loans, recently offered fixed interest rates from 6.74 percent to 12.49 percent, depending on the borrower's credit. The company offers loans with terms from 3 to 15 years.

You may be able to arrange an interest-free loan through your contractor as well. However, if you're unable to pay off an interest-free loan before the term expires, you’ll probably owe interest backdated to the day you signed the agreement. In this arrangement, make sure you don’t lose the right to withhold payments if the contractor's work isn't done to your satisfaction, if that was a term of your contract.

Having a contractor also be your lender means you'll need to vet him in both roles. Ask past clients about any problems they experienced using his financing. Check whether there are complaints about the company’s financing deals with your state’s office of consumer affairs and the Better Business Bureau.

Use a Zero Percent Credit Card

If you're a disciplined borrower, you could use a card with a zero percent introductory rate to pay for a renovation. You could have as long as a year and a half to pay back the balance. But try that approach only if you know you can pay off the balance before the introductory period ends. 

Look Into a Personal Loan

The advent of online lending portals has made it easy for borrowers without collateral to get an unsecured personal loan from both national and local lenders. The rates for this type of debt are significantly higher than for home equity debt; on Bankrate, average APRs for personal loans range from a low of 10.3 percent for someone with excellent credit—a FICO cedit score of 720 and higher—to 32 percent for someone with poor credit.

But you can find much lower rates from individual lenders. Lightstream, a division of SunTrust Bank, for instance, is currently offering unsecured home improvement loans at 4.99 percent APR for between $10,000 and $24,999; the loans last up to 36 months, and borrowers must have excellent credit. 

One advantage of these loans is that borrowers can get them very quickly—within a few days or even the same day—less time than it typically takes for a bank to approve a home-equity-based loan or line of credit, says Steve Allocca, LendingClub's president. What's more, you're not putting your home at risk when you borrow this way because it's not used as collateral against the loan. 

But if you have more time, you may be able to find less costly alternatives. One tip, says Cundick: Check out credit union rates in addition to banks; they can be far less costly. And when you compare loans, take into account their full cost, including rates, closing costs, origination fees, and any other charges.