From something minor like fresh paint, to something major like adding additional rooms, home improvement projects can make your home a better place to live as well as increase its value. The cost of these projects can be daunting and they can add up fast. Let’s take a look at several options for financing home improvement projects.
Depending on the cost of your project and how much you have available in savings, you might want to consider paying for it with cash. The good: no payments to make, no interest, and many contractors offer discounts for those who pay cash. The not-so-good: you may end up draining your emergency fund to cover your project, or you may not have enough saved to even cover your project entirely since there are often what I call “unforeseeables”.
A personal loan is an unsecured installment loan where you receive a lump sum and immediately begin paying it back with interest in regular monthly payments. The good: you don’t need equity in your home to get the loan, your home isn’t used as collateral so it isn’t at risk if you don’t repay the loan, and you can use the loan to pay for anything, not just home improvements. The not-so good: personal loans usually have higher interest rates than home equity loans, repayment terms are fairly short which can make it hard to pay off a larger loan, and interest paid on a personal loan is not tax-deductible. These are sometimes called “hard money loans”.
Home Equity Line of Credit
Depending on how strong your credit is, you may qualify for a HELOC, which is essentially a form of revolving credit that is secured by the equity in your home. You can usually borrow 60-85% of your home’s assessed value, minus the remaining balance of the mortgage. This type of loan allows you to draw on your credit for an extended period of time, usually up to 10 or 20 years. The good: instead of getting a lump sum that you have to start repaying immediately, you can borrow only what you need. Interest paid on a HELOC may be tax deductible, and interest rates are generally lower here than on personal loans or credit cards. The not-so-good: most HELOC interest rates are variable, which means your payments could increase. You could potentially end up owing more than your home is worth if the value of your home decreases, and if you can’t repay the loan, you could lose your home.
Home Equity Loan
This is a second mortgage that uses your home’s equity as collateral. You can usually borrow 75-85% of your equity, effectively repurposing your equity to put that money back into your home. The good: interest rates are usually lower than HELOC, credit cards, and personal loans. Interest rates are fixed, making it easier to budget for the payments. Interest paid may be tax deductible, and long repayment periods can make it easier to pay back larger loan amounts. The not-so-good: since you are reducing your home’s equity, it will take longer to pay your mortgage off, and if you can’t repay the loan, you could lose your home.
This should probably be your last option unless the project is very small. The good: credit cards are readily accessible to most, and depending on the type of credit card, you may earn rewards for credit card purchases. The not-so-good: you may not have a high enough credit limit to completely finance your project. A large charge could potentially hurt your credit score by increasing your credit utilization ratio, and credit card interest rates tend to be quite high. I do not really recommend this route in any situation, but if you MUST have it
Before taking on any debt to finance home improvement projects, make sure to consider all your options and find the one that is best for you. If you decide to go the cash route, keep in mind that putting all your money into redoing your home can leave you house-proud but cash-poor, which could have long term consequences on your credit and personal finances. If you decide to apply for a loan, check your credit report and see where you stand to better understand the type of credit you’re likely to qualify for.