If you’re like many homeowners, you probably look around your house and see numerous projects you’d love to tackle. New countertops, new cabinets, new floors, there’s so much you’d like to do! But how in the world will you pay for it all? One option is home improvement financing.
Common Home Improvement Financing Options
When it’s time to remodel your bathroom or kitchen, you have a wide array of finance options available. The most common include:
- Credit cards
- Home equity loan or line of credit
- Home improvement loan
What you’ll pay for these options depends heavily on your credit rating, how much you need to borrow, and how long you need to pay it back.
Credit cards for home improvement
Depending on the size of your project and your available credit limit, you may be able to finance your remodel or renovation with credit cards. This is a popular option for some homeowners because the process is fairly hassle-free. No application or approval process, no appraisal, no origination fees. Just make sure you pay more than the monthly minimum, or you’ll spend decades paying for that home improvement project.
If you can find a zero-percent introductory offer, that’s a great option. Just be sure you can pay off the balance in the allotted time. You don’t want to carry over a $10,000 balance once that interest rate flies up.
Using your home’s equity
Although they share many features, home equity loans and home equity lines of credit (HELOC) are not exactly the same thing.
First, the similarities. Both finance options use the equity you’ve built in your home. In addition, you usually get to deduct the interest payments from your taxes (talk to your accountant to find out for sure). The average interest rate for both hovers between 5.5 and 6 percent. Finally, you usually need at least 25 percent equity for either option, although some banks allow as low as 20 percent.
The difference comes in how you access the funds. With a home equity loan, you borrow a fixed amount of money. You also have closing costs, typically between 2 and 5 percent of the loan amount.
A HELOC is a revolving line of credit, meaning you can withdraw money as needed. The draw period varies, so look carefully at how long you have (most experts advise looking for a HELOC with a draw period longer than 10 years). Also, ask the lender about fees, including maintenance fees. It’s the only way to know who offers the best deal.
Consider a home equity loan when your project has delineated start and end dates, such as kitchen remodeling. For open-ended projects, you may find the flexibility of a HELOC works better.
Home improvement loans
Home improvement loans are a type of personal loan. Rates vary widely and the loan may be secured or unsecured, depending on the lender and your credit.
Interest rates can go extremely high with this option – 35 percent and more – so be very careful when considering these offers. You usually pay a higher interest rate for an unsecured loan. While a secured home improvement loan charges lower interest, it typically uses your house as collateral.
Finally, determine the loan’s terms, meaning how long you have to pay back the loan, and the fees required. Origination, closing, and administration fees are common.
Non-Traditional Home Improvement Financing Options
If you don’t have a lot of equity in your home or you want to limit how much you finance via traditional methods, you may like these out-of-the-box options.
- 401(k): Some 401(k) retirement plans let you borrow against them to complete home improvement projects. Benefits include no credit check, low interest rates, and fairly quick turnaround on getting your money. Drawbacks include a five-year repayment requirement. Also, if you leave your job before repaying the loan, you face serious penalties for early withdrawal if you can’t pay the money back in full.
- Life insurance: Some life insurance policies allow you to borrow against the cash value of your policy. You have to pay back the interest, but there’s no credit check required. However, if you pass before repaying the loan, it reduces the death benefit your family receives.
- Stock portfolio: Commonly referred to as a margin loan, this allows you to borrow against your stock portfolio. As with anything related to the stock market, though, there’s risk involved. If your stock performs well, you may get to keep the money and never pay back a dime. If it doesn’t, you’ll probably have to sell the stock.
There are also Title 1 loans, which are backed by the Federal Housing Administration. However, these are only available for improvements deemed “essential” or to make your home wheelchair-accessible. In addition, you must have limited equity in your home.
When we say be realistic, we mean two things. First, be realistic about the value of your project. Kitchen and bath remodeling add value to your home both aesthetically and financially. However, you won’t get a 100 percent return on your investment (few home improvement projects offer that kind of return). Which brings us to the second point. Don’t spend more on the project than you can reasonably expect to repay just because you figure you’ll recoup your costs when you sell your home. Set a realistic budget with a monthly payment you can comfortably absorb. You don’t want to lose your home in your quest for the perfect kitchen.
Work with Experienced Contractors
The experienced design team at Stradling’s helps guide you through the entire remodeling process. We can even help you figure out your budget and how to maximize every dollar you spend. Schedule your free consultation today to learn more.