Homes need a little love every now and then. Maybe it’s finally time to make it a little more livable by finishing your basement or your attic or giving your bathroom tiles a serious refurbishing. You could also be planning on selling your house, and you want to raise its value, or maybe there are some small issues here and there that could potentially become full-fledged problems sooner rather than later.
Whatever your reason for a home improvement project, you’re probably second-guessing due to the money often required to pull it off. Sure, small projects may only require grabbing equipment already available to you and a few hours out of your day, but big changes like bathroom renovations can amount to around $8,000. Remodeling your kitchen can get even pricier as it can cost upwards of $12,000.
While saving up for a specific project is the ideal way to pay for your home upgrade, it isn’t always possible. It will depend on the size of your project, your current financial situation, home equity, credit, and the goals you wish to achieve with this improvement.
Once you’ve decided to push through with your project, you have several options when it comes to financing it.
1. Cash-Out Refinance
Cash-Out refinance lets you change the terms of your mortgage and cash out a portion of the equity you have in your home. You can then pocket the difference between your old mortgage and this new loan to make home improvements.
However, there are a few drawbacks to this financing option, so consider it carefully. You should only opt to refinance if you can secure a lower interest rate than what you pay right now. With this method, keep in mind that you will need to pay for an appraisal, taxes, origination fees, and other closing-related costs.
2. Home Remodel or Repair Loans
If you’re only planning a small or midsize project like a window replacement or a simple bathroom makeover, this is the financing option for you.
Banks, credit unions, and a host of online lenders offer home improvement loans. These are typically unsecured personal loans, which means you won’t need to use your house as collateral to qualify. Your qualification, as well as your interest rate, will be based largely on your credit score.
For this type of loan, funding comes quickly once you agree to the terms and conditions. Lenders will deposit the money straight into your account in as little as 24 hours. Compared to HELOCs, home remodel or repair loans have shorter repayment timelines, fewer fees, and lower loan amounts.
Be wary of this option, though, especially if you have fair or poor credit. Since this type of loan is unsecured, they typically have higher rates than HELOCs. Before getting a loan, make sure to do thorough research on the loan lenders you come in contact with, as some may charge exorbitant fees for application processing and late payments. Compare and contrast so that you can choose loan lenders that offer friendly repayment terms, quick payouts, and lower interest rates.
3. Home Equity Line of Credit (HELOC)
When it comes to home improvement financing, HELOCs are a common choice. HELOCs are secured loans wherein you can qualify for lower rates compared to unsecured personal loans.
However, with HELOCs, you will have to put up your home as collateral, so there is a possibility of it being foreclosed should you not make your payments on time. HELOCs also have variable interests, which means the increase of your payments will directly depend on market conditions.
A HELOC is a revolving credit, meaning you can take what you need when you need it up until you reach your borrowing limit. This financing option is perfect for ongoing or lengthy renovation projects.
Remember that, since you’re borrowing against your house, you will need sufficient home equity. Make sure to have at least 15 to 20% equity in your home.
4. Home Equity Loan
If you know just how much you’re going to spend on your home improvement project, why not get a home equity loan? Also known as a second mortgage, this type of loan is a lump sum that you can repay over a number of years, typically in regular fixed monthly payments.
Unlike HELOCs, you wouldn’t need to worry about market fluctuations as once you lock in your fixed interest rate, you will be paying the same amount monthly over the life of your loan.
However, this loan offers less payment flexibility than with a HELOC. Missing payments can also significantly damage you, as home equity loans use your home as collateral.
5. Government Loans
One way to save on the cost of insurance and interest is by applying for a government loan.
One type of loan that the government provides is the HUD Title I Property Improvement Loan that lets you borrow up to $25,000 without having any equity in your home. However, some home upgrades may not qualify for this loan. You have to make sure that the money from this loan will go towards renovations that improve the livability of your home.
6. Credit Card
Keep in mind that there are huge risks associated with making large home adjustments on a credit card, such as high fees and interest rates. Using your card is best saved for making minor updates to your home. This can include installing a new closet system or adding small pieces of furniture here and there. Take advantage of cards that are interest-free for the first few months.
Aside from all the financing options stated above, remember to plan well. Do your research and create a budget you’re sure you can stick to. Keep track of all your expenses and be smart when buying furniture, materials for construction, and other paraphernalia.
