Current economic conditions are inspiring more people to remodel and repair their existing homes rather than buy new. Because whether you’re overhauling your kitchen to give it a more bright, open look or adding on a much-needed bedroom, remodeling projects increase your home’s value.
Determining what improvements you want to make is one thing; figuring out how you’re going to pay for it all is quite another. Here are the financing options you’ll want to consider:
Cash. Paying with cold, hard cash can be an attractive option if you’re planning a small-scale project—or if you’ve been purposely socking away cash to finally finish your basement. You won’t be charged interest or rack up debt like you would with other options (debt-free is the way to be, I always say). But you still want to think twice before tapping into your personal savings. After all, you’re using money that would normally be earning interest—and could be used for other purposes such as college. Plus, you can’t write off project expenses paid in cash. If you do go this route, continue to faithfully stash cash into your personal savings account to ensure you have a viable safety net to cover unexpected expenses.
Credit card. Another option that’s best suited for smaller, less-costly projects. Swiping plastic subjects you to high interest rates and late fees if you default on payments—and there’s no tax deductions available. According to Credit.com, the best strategy is to charge the project to a card with a high credit limit and low interest rate.
Home equity line of credit (HELOC). This is a form of revolving credit where your home becomes collateral. You pay interest only on what you use as you draw from this line of credit—and the interest is tax-deductible. But because there’s a variable interest rate with this type of financing, payment rates fluctuate based on prime interest rates (and that makes it hard to budget on a monthly basis). With a HELOC, you’re approved for a specific amount of credit—a percentage of your home’s appraised value (often 75 to 80 percent, according to the National Association of Home Builders). That amount is subtracted from the balance owed on the existing mortgage. Other factors affecting your credit limit include your income, debts, and your credit history. Learn more about this option here.
Home equity loan. Planning a one-time project? With a home equity loan, you get the entire loan up-front and gradually pay it off. Plus, you won’t have to worry about the interest rate wavering with this loan, because it’s fixed (making it easier to budget into your monthly finances!). Be sure to agree to terms you know you can afford.
Cash-out refinance. With a cash-out refinance, you replace your current mortgage with a larger one, using the extra cash to pay for the project. Payments are spread out over time. Plus there’s often a lower interest rate than with home equity financing. When considering this option, pay attention to up-front costs: application, appraisals, and title insurance, as well as the number of years left on your current mortgage.
203 (k) mortgage. If your older, fixer-upper home is seriously in need of rehabilitation and modernization, you’ll want to look into a 203 (k) mortgage. Why? You can refinance the existing mortgage and combine it with home improvement costs into a new mortgage, therefore avoiding high interest rates associated with interim financing. The loan is based on the home’s projected value after improvements are made. A 203 (k) mortgage is administered through the Federal Housing Administration. Learn more on the Department of Housing and Urban Development website.
Personal loan. A personal loan isn’t tied to your home—it’s usually tied to collateral such as savings accounts, stocks, bonds, and more. With this option, you can borrow as much as $25,000. However, you’ll probably acquire a high interest rate (often higher than with other options). The interest isn’t tax-deductible. Shop around to find the lowest interest rate.
Want to know more about the options available to you? Visit the National Association of Home Builders and Service Magic for more details. You’ll also want to seriously consider consulting your financial advisor before reaching a decision.
The Home Know-It-All