Most people who own their home probably has a long list of home improvements they want to make: replace the kitchen counters, replace the family room floor, build an addition, or renovate the master bathroom. There are a plethora of home improvement loan programs that come in many shapes in sizes.
Naturally, what slows down most home improvement projects is cash, or lack of it. Many home remodeling projects can run into the tens of thousands of dollars. But the good news is that there are many options available to finance home improvements. Let’s review eight of the best ways.
#1 Refinance Your Mortgage and Take Cash Out
For homeowners who are carrying an interest rate that is higher than the current rates, this is the most obvious option. You can refinance your mortgage at a lower rate, and pull out equity to pay for your home improvements. Homeowners love the benefits of the cash out mortgage refinance option if they get the money they need while maintaining a low interest rate.
Note that you need to have substantial equity to do this; most lenders will decline to refinance your mortgage if you have less than 10% equity in the home. Further, remember that if you spread the costs of your renovations over 20 years, those renovations could easily need replacing before you are done paying for them.
If you can get a rate that is at least .5% lower than you are paying now, you could benefit from refinancing.
#2 Home Equity Line of Credit (HELOC)
If you are satisfied with your first mortgage, you also can bet a HELOC, which is a form of 2nd mortgage. With a home equity credit line, you pull money out of your home’s equity as you need it for your projects. You then pay it back as you can. You must make minimum monthly payments.
The advantage of a HELOC is that you do not have to pay any interest until you pull out the money. Also, the credit line is usually for 10 years, and you can use it again once you pay it back. The credit line is the most popular home improvement loan for borrowers that have equity. If you don’t have equity, consider the 203k program that requires no equity.
On the down side, if you can’t make the minimum payments, you can lose your home. Also note that rates are adjustable after the draw period ends, so your payments could go up.
#3 Home Equity Loan
A home equity loan allows you to borrow a fixed amount of your equity and make a fixed payment over time. The most common term is 15 years, but you can stretch it out to 20, 25 and in some cases, 30 years.
An equity loan sometimes has a higher rate than a HELOC, but the advantage is that the rate is fixed. This is more attractive to more conservative homeowners.
#4 Construction Loan
Construction loans are used to make major home renovations or to build your home. If you want a new family room addition that costs more than the equity you have, you might consider a construction loan.
This is a short term loan of five years or less in most instances. You need to refinance it into a regular mortgage when the renovation is done.
#5 FHA 203k Loan
The 203k loan program is usually for buying a home that needs major repairs. But you can also use it to refinance and use the cash for home repairs.
Remember that you will need to carry mortgage insurance for the life of your FHA mortgage payment, unless the laws change; it is possible that the Trump administration could change this rule. But for now, you must pay mortgage insurance for the life of an FHA lien.
There also is a Streamlined 203k Loan Program that can lend you up to $35,000 for relatively minor repairs.
#6 Credit Cards
You can pay for smaller renovations on your credit cards. Or, you can at least buy the materials on credit cards and pay cash for the labor.
It is not a good idea obviously to put a large renovation on credit cards and pay 18% interest for several years. But using credit cards can be a feasible short term solution.
Some homeowners like to use credit cards for the materials because they want the credit card points.
#7 FHA Title 1 Loan
These loans can be up to $25,000, and are available from FHA-approved lenders at market rates. The term can be as high as 20 years. You do not even need to have equity in your home.
#8 Borrow from Retirement Account
Most 401k and IRA programs will allow you to borrow money from your account and pay the loan back over five years. You pay the interest to yourself, so this is not always a bad deal.
Remember however: If you leave your job, the balance must be paid in full. This option is a long-shot and one that should be discussed with your financial advisors extensively.
There are many good ways to pay for your home improvements without using a lot of your savings. The best way to pay will always be cash, from a cost perspective.
Second would be using your home’s equity to make the improvements. The argument for this method is that your interest payments will be much lower than credit cards. Also, you can usually write off the mortgage interest on your taxes.
Make sure that you are doing home improvements that will pay you back well when you sell your home. But if you do your homework, you should be able to find a way to finance your improvements, so you can enjoy your home more for many years to come.