If you’ve decided to renovate your home, you’ll need to work out how to finance the project.
Given that most of us have been sheltering in place since March, it’s no wonder that we’re in the mood to renovate our homes. The online remodeling platform Houzz reported a 58% jump in the number of contractors’ project leads this June from the year before. Contractors working in outdoor spaces saw the largest increase, as folks looked to have pools and spas installed. Homeowners also seem far more interested in decks, patios, and landscaping than they were pre-pandemic. Kitchens and baths, traditionally the most popular remodeling projects, saw a 40% increase in demand.
If you’re itching to give your place a facelift, you may wonder about the best way to pay for it. Here are six possible home renovation financing options:
1. Personal loans
Personal loans are available through online lenders, banks, and credit unions. It is not uncommon to find personal loans for as much as $100,000. If you have a strong credit score, you should qualify for today’s attractive rates and terms that suit your needs. Most personal loans are unsecured, meaning there is no collateral for the lender to repossess if you default on payments. That said, don’t agree to loan terms if you think you might default — it can destroy your credit and even land you in court. Here are some of the best renovation loans on the market right now.
2. Home equity loans
Since it’s your home that’s getting spruced up, consider a home equity loan. With a home equity loan, your home acts as collateral, meaning it can be repossessed if you fail to make payments. But that collateral also means you’re likely to score a lower interest rate. Home equity loans are distributed in one lump sum and typically repaid over five to 30 years.
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HELOC stands for home equity line of credit. Like a traditional home equity loan, it uses your home as collateral. The difference is that you get a specific revolving borrowing limit. Let’s say you want to put wood floors into your home and remodel the master bath. Rather than distribute your entire loan at once, a HELOC allows you to withdraw only the funds you need for each project. Further, if you pay back a portion of the loan, you can draw on it again when needed. Lenders have been reluctant to issue HELOCs during the pandemic, but they are starting to come back now.
4. Credit cards
Credit cards make zero sense for large projects, but they can work for small renovations — particularly if you have a card with a 0% promotional APR. Say you want to do a few little things to spruce the place up, like paint the common areas, change the hardware on cabinets, and have the house power washed. If you charge it to a card with a 0% promotional rate, you’d get up to 12 to 18 months to pay the debt off in full with no interest. The caveat here is that you must pay the debt off before the promotional rate expires or be hit with a prohibitively-high interest rate.
If you want to use a credit card with a standard interest rate to pay for small projects, plan to pay your balance off in full when it becomes due. Otherwise, credit cards are one of the most expensive ways to pay for home renovations.
5. Government loans
The U.S. Department of Housing and Urban Development (HUD) offers two programs, each designed to help you pay for home renovations.
The first is called the Section 203(k) Program. It allows you to refinance your home and include the cost of renovations in the new loan. HUD’s Title 1 Property Improvement Loan can also be used for renovations. The two programs can be used together or alone, but be aware that there are restrictions on how much you can borrow (based upon FHA limits in your area), and how you use the cash.
Mortgage refinance loans do come with closing costs and fees. In addition, a 203k may include extra fees, like funds paid for a HUD consultant, a feasibility study, building permits, surveys, and mortgage insurance. Title 1 loans require you to carry loan insurance of 1% annually on the amount borrowed. For example, if you borrow $24,000, your loan insurance would run $20 per month.
While we’re on the topic, it’s also worth looking into ordinary cash-out refinance loans that let you take advantage of the current low mortgage rates.
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6. Save and pay
Nothing says you have to complete an entire home renovation at one time. Saving your money to pay for new projects as and when you can afford them offers three distinct benefits:
- It gives you time to consider what you really want your home to look like, rather rushing in.
- As you save, your bank account grows. If, while you’re waiting to begin a project, an emergency arises, you’re more likely to have the funds to cover it without borrowing money.
- When the time comes to begin a project, you won’t need to take out a loan and can avoid interest and fees altogether.
Our homes feel like an extension of us, a reflection of who we are. If you’re considering renovations, take your time and choose the best way to finance the project. It will make the entire experience more enjoyable.