Anyone who owns their home probably has a list of home improvements they want to do. Whether it is renovate the kitchen, add a bathroom or update the A/C system, most of us have plenty of things on our wish list.
What often stands in the way is money, naturally. Many home improvements cost thousands of dollars. But there is good news: There are many realistic ways to come up with the money for a home improvement project. With easier credit standards in 2018, fixing up your home the way you want might just be easier than ever.
However, experts advise you to keep a few things in mind before you even consider using money or getting a loan to do a home renovation. They say the biggest error people make is they finance home improvements for a period that is longer than improvements will last. If you take out a loan for 20 years to pay off a home improvement, you may still be paying mostly interest by the time the renovation needs to be replaced. Fortunately, in today’s economic environment there are a handful of home improvement loan programs to consider.
Below are the top options for paying for your home modeling and repairs:
#1 Use Your Own Cash
If you can, it is best to pay cash for your home improvements. You do not have to worry about additional monthly payments and you will not affect the equity on your property. If you can afford to wait, it is always best to save up the money for a few years and pay for the project with all cash. If this is hard, consider breaking down your home improvements into manageable chunks. For example, you can break down the kitchen upgrade to several chunks, such as flooring, counters, cabinets and appliances. As you get the cash, you can move on to the next stage of the project.
#2 Do a Cash Out Refinance
If you do not have the cash to do the home improvements you want, doing a refinance for cash out may be the way to go. Mortgage interest rates in 2018 are very low in the range of 4%. Even though the economy is taking off and the Fed has raised rates and plans to do so again soon, you may be able to score a lower interest rate on a refinance than your current rate.
It is important, however, to make sure you are not financing your home improvements for a longer period than the improvements will last. If you have to finance your kitchen for 25 years and have to redo it in 15 years, this is not a good use of your equity.
#3 Get a Home Equity Line of Credit (HELOC)
If you do not want to refinance your first mortgage, consider a home equity line of credit or HELOC. With this line of credit, you will draw money out of your property as it is needed and pay it back as you like. There are minimum monthly payments that will eventually increase after the draw period ends. This is the time in which you may take out cash, which is usually five or 10 years. After that, you must start paying back principal as well.
You can typically take out up to 80% or 85% of the home’s value, minus what you owe on the first mortgage.
If you are unable at any point to pay that loan, you could lose your home. Thus, make certain that you will have sufficient income in several years to continue to make those loan payments.
HELOCs have a variable interest rate after the initial fixed period of a few months or years. They can and often do go up after that. The interest rate initially is lower than a home equity loan, and therefore most people choose the line of credit option over a home equity loan.
#4 Look at Home Equity Loans
A home equity loan is also based upon your home’s equity. But in this loan, you borrow your equity with a fixed payment schedule that does not change. It is common to have a 15-year loan, but a five or 30-year term is also possible. A home equity loan carries a higher rate than a HELOC, but you may prefer it if you feel nervous about an adjustable interest rate. You may see HELOCs in the range of 4.5% these days, and home equity loans about one point higher. If you have less than perfect credit, consider a home equity loan with fair credit.
The major advantage with a home equity loan is you will never have to worry about payment shock; you know exactly what the payment will be for the entire loan term.
#5 FHA 203k Loan
The Federal Housing Administration allows you to do a 203k-FHA loan which can finance up to $30,000 or $35,000 of home repairs. It is not based upon the equity in the home. Note that you will have to carry mortgage insurance for the life of this loan.
#6 Credit Cards
It is possible to cover smaller renovations with your credit cards, but it is not a good idea to finance large projects over years with high interest credit. Some home owners choose to buy materials with credit cards because they want the rewards points.
If you choose wisely, home renovations can pay you back handsomely when you sell the home. Consider using one of the above options to fund your home renovation project today.
References: Top 11 Ways Homeowners Can Fund Home Improvements. (2015). Retrieved from https://realestate.usnews.com/real-estate/articles/11-ways-homeowners-can-fund-major-home-improvements