Homeowners consider renovations for a number of reasons. Perhaps a growing family needs a re-configured space, or empty-nesters want to combine two bedrooms into an owner’s suite. Or perhaps aging homeowners are thinking ahead to the need for accessibility features so they can safely age-in-place. Another big reason people undertake renovations is to update the features of the home in order to raise the value before putting the home on the market.
Whatever your reason for undertaking a renovation, you may be wondering about the best ways to finance the project. As with any large expense, your choices are likely going to be driven by personal needs, so there is no “one-size fits all” solution.
Below are just a few of the more popular ways to finance your home improvements.
Unsecured Home Improvement Loan
Depending on the size of your project, you may be able to get an unsecured loan to cover the costs. The advantage of this type of loan is that your house is not collateral for the loan. In fact, such loans are often called “signature loans” because they require no collateral at all – just your strength of your credit and your signature/promise to pay.
Another advantage is that you are likely to get a higher credit limit than you would on a credit card, but that’s not a license to spend! Find out how much your monthly payments will be before you sign for the loan, too. You don’t want to put yourself in a situation where you can’t meet your other obligations.
Not everyone has a liquid slush fund that they can pull from for hefty renovations. There are two schools of thought on this. Those that prefer cash would recommend that you always pay with cash if you have it. However, there are others who do not recommend paying cash, especially if you have to liquify assets to do so. The reason is that you may earn a greater return keeping your assets invested, since you may earn more by keeping that money working than the interest you’ll pay on a loan.
Home Equity Line or Cash Out Refinance
If you have adequate equity in your home, you can use it to make home improvements. There are a variety of ways to do this, so you may want to consult a mortgage lender or tax consultant to see which would work best for your situation.
A Home Equity Line of Credit (or HELOC) is just as it sounds. It’s a line of credit that is made available to you based on the amount of equity you have in your home. The advantage of this type of loan is that you only pay interest on the amount of the credit line you use. It gives you the flexibility to pay contractors directly out of the credit line, without having to take a large lump sum.
A Cash-Out Refinance also allows you to tap your equity, but you are refinancing your entire mortgage. You may want to consider this if interest rates have dropped sharply since you obtained your mortgage. When you close on the loan, a certain amount of your equity is “cashed out” and given to you at closing in a lump sum. You’ll start paying interest on the full amount of the loan immediately, and the clock restarts on rebuilding your equity in the home.
A disadvantage of both financing types is that your home is the collateral for the loan. If you should run into financial trouble in the future, you could lose your home. You may want to consider whether you want to tap your home equity, especially if it’s close to being paid off.
Use a Credit Card
We certainly don’t recommend using a high-interest store card to finance your home improvement project. However, if you have good credit, you may be able to obtain a card with a 0% introductory rate. If you can pay off the balance before the introductory period ends, you will pay zero interest.
Another advantage to using a credit card is if you have cards with rewards programs attached, such as cash back or airline miles. If you project is in the 5 figures, you may earn enough cash back to put towards other renovations, a vacation, or to pay down the balance.
We do want to caveat this with a caution. If you plan to use a credit card, make sure it is in your best financial interest and make sure you are going to be able to make timely payments of more than the minimum. Smart use of credit can improve your credit scores, but if you damage your credit, you could limit your ability to make future purchases on credit – including moving to a new home.
So be wise and only use credit cards if the terms are good and you are certain you can afford it.
Good luck with your renovation project! If you need recommendations for personal lenders or mortgage lenders, give us a call! When it comes to buying or selling your home, we are here to help answer any questions and guide you through a better understanding. Please do not hesitate to contact us at firstname.lastname@example.org or phone us at 202.800.0800.
Tags: Tim Pierson, Northern Virginia, Home Renovations, Financing, Mortgage lending, Credit Scores, Credit Cards, Home Improvement