Remodeling your home? Here’s how to pay for it.

Many Americans have turned their attention to improving the homes where they’ve increasingly spent time during the pandemic. Renovating your house not only can make it more enjoyable to stay indoors, it also can boost the home’s value and become a profitable long-term investment.

But it’s a decision-heavy process. There’s deciding on the renovation project itself, followed by deciding how much to pay, and, if needed, how to finance it.

Angi, a home services platform formerly known as Angie’s List, has released its 2021 True Cost Report, showing a typical range of bathroom remodeling costs between $6,590 and $16,359 and kitchen remodels between $13,490 and $38,043. You can type in your zip code for a localized estimate.

Unless you have significant savings built up, five-figure home renovations will mean taking out a loan of some sort. Luckily, there is no shortage of options for borrowing money to make that dream project a reality.

Whether that renovation makes financial sense, and what borrowing option is best, will depend on a range of factors, including the cost of the home, cost of the project, owner’s credit score, familiarity with construction, risk tolerance, and confidence in the market.

“The best payoffs tend to be large visual changes for a modest price tag, things like exterior projects with curb appeal,” said Mischa Fisher, chief economist at Angi.

» READ MORE: Here’s how to refresh the exterior of your house, the part everyone sees

Consider these options for financing your project:

Savings. There is no interest to pay back and no paperwork to fill out. Even so, homeowners should be mindful to select a project that gets the best return on investment and may want to think twice about tapping savings for home renovations.

With interest rates at or below 3% in many cases, it might make better financial sense to take out a loan and look at investing that savings elsewhere.

“If you’ve got somebody who’s confident they can get a better return than 3.5% by investing their savings, I’d encourage them to at least discuss the opportunity cost of using that cash,” said Patrick Walsh, senior vice president at Tandem Bank in Atlanta. “If you’re paying down debt at 3.5% when you could get a return of 6%, you may be better off using some of that cash for something else.”

» READ MORE: Philadelphia-area median home prices have risen 48% in the last decade

Construction loan. Products such as a Federal Housing Administration 203(k) or Fannie Mae HomeStyle Renovation loan can be made based on the presumed higher future value of a home after renovation. However, they are not simple to use and usually involve tricky terms.

“FHA 203(k) and Fannie Mae type construction loans are expensive,” said Erika Safran, principal of Safran Wealth Advisors in Manhattan. “They are highly regulated, and funds are released to your contractor based on stages of construction.”

Safran adds that construction loans can also include private mortgage insurance and that there are ongoing evaluations and appraisal costs during the project. For those who use a construction loan, she advises refinancing to a conventional mortgage once the renovation project is finished.

Personal loan. For homeowners looking to borrow a relatively small amount, a personal loan could make sense because there is less upfront cost, and it’s paid back more quickly than a full refinance (usually within seven years). While rates are higher than for a HELOC or mortgage, they are usually lower than a credit card.

Cash-out refinance. Mortgage refinancing has been a popular option for homeowners for a long time regardless of whether they’re renovating. The reason? Interest rates have been falling for decades.

A cash-out refinance means replacing the existing mortgage with an entirely new one. If the cash-out loan is used to pay for renovations, it will be for a larger amount than the initial loan. With interest rates so low at the moment, the homeowner could still wind up with a lower overall payment afterward, though for a longer loan term.

Cash-out refinancing also means the money goes to the homeowner rather than to contractors, making it more flexible than a construction loan.

» READ MORE: Homeowners refinancing federal mortgages will pay less when pandemic fee ends Aug. 1

Home equity line of credit. A HELOC is a good option for those with enough equity. While the closing costs are low and so are the payments, those initial payments are interest-only. Homeowners can also take a tax deduction for the interest paid. Safran said it’s important for people to fully understand the terms of a HELOC before they sign.

"Consumers may mistakenly opt for a HELOC because of a low payment without realizing the minimum payment covers only interest," she said. "In order to fully pay off the loan within the five-year time frame, homeowners should pay both principal and interest."

Borrowing against the equity in your home can also be risky should prices fall again, as they did during the Great Recession. Tandem Bank will allow homeowners to borrow up to 80% of the value of their home using a HELOC, Walsh said, but some lenders go all the way up to 95%.

401(k) loan. Borrowing against your retirement savings can be a quick way to get cash, and you’d pay interest to yourself rather than an outside lender. Borrowers can usually take out up to $50,000 or 50% of the balance.

But as with using personal savings, Walsh cautions consumers about taking money out of their 401(k), which is invested in stocks and bonds, and using it to invest in a renovation.

"If you're using it just as a gap to get the house finished and then once it's done you put permanent debt on it, that could be a viable option," he said. "But long-term, what is the opportunity cost of having that money out of the [stock] market? I don't think long-haul you'd get the same return in real estate that you'd get on the 401(k)."

Credit card. Another option sometimes discouraged by financial advisers is using a credit card. A disciplined borrower can open a new card and take advantage of six- or 12-month no-interest periods to borrow money for free. But if this plan doesn’t work out, the borrower will be hit with interest rates ranging up to 20% or higher.

Although credit cards have the highest rates, there are no additional upfront or closing costs, and if debt is paid off in one or two years, you can complete the project without adding on long-term debt.