Whether you’re preparing to sell your home or you want to expand your living space, a home renovation can be a big undertaking. While renovating your home may increase its value, the first step is to determine the scope of the project and figure out how you’ll pay for it. It’s important to think ahead about how to finance your home project so you can avoid added costs and future financial problems.
Some questions to consider are, will you be completing the renovation yourself? Or will you need contractors to do the work? Will it be more cost effective if you do the project yourself? Or part of the project yourself before you have help come in to finish it?
To help answer those questions, it may be worth speaking with a contractor to get an idea of how much your project will cost. Or if you decide to complete the project yourself, visit your local home improvement store to get an idea of how much materials will cost. It’s always a good idea to take a look online to price out products and materials to compare.
Once you determine how the project will get done, you’ll be faced with a number of different options to finance the addition or renovation. It’s essential to take the time to understand the difference between each way you can pay for it and consider which option can help you borrow the money you need, with the lowest monthly payments.
1. A Home Equity Loan or Line of Credit – As you pay down the principal balance on your mortgage, you build equity which can be used through either a Home Equity Line of Credit (HELOC) or Home Equity Loan (HELOAN). A HELOC is a variable rate line of credit secured by your home, meaning you are borrowing against the available equity in your home. That equity can provide you with an option for low-cost funds in the form of a credit line. Your house is used as collateral for the line of credit. A HELOAN is a fixed interest rate loan also secured by your home, with the borrower receiving a set amount and making a fixed payment each month.
2. Refinancing Your Mortgage – When deciding whether to refinance, consider how much equity you have in your home. Some homeowners may be able to refinance their mortgage for a higher amount in order to fund a home renovation. This is a good option if the new mortgage has a lower interest rate than your current home loan and if you need a large loan to renovate your home that you plan to stay in long-term. Use our calculator and read our blog, “Should I Refinance My Mortgage?” to help answer the questions you may have about refinancing.
3. Simply Home Improvement Loan – This type of loan has a competitive fixed rate, a specific borrow amount and allows up to 5 years to repay your loan. Since the loan is unsecured, you don’t need to use your house as collateral. The interest rate and qualification are based on your credit score. The funds come quickly once you agree to the terms. Home improvement loans typically have shorter repayment periods and lower loan amounts.
4. Credit Cards – If your home improvement project is minor and doesn’t come with a hefty bill, a credit card may be one of the best home improvement financing options. Some cards are interest-free for the first few months and if you can, use a 0 percent introductory APR card so you can pay for the project without every paying interest. Another credit card option for home improvement projects is a store-issued credit card from places like Lowes or Home Depot as these cards usually have benefits for making purchases within the store as well. However, be careful not to overspend so you don’t fall into a cycle of debt!
5. Save – The smartest and safest way to pay for your home renovation is to save for it! This may sound old fashioned, but saving your hard-earned money to pay for a home project is more satisfying than it sounds. You won’t have to worry about paying back a loan or paying off a large credit card bill once the renovation is finished. The amount you need to save will depend on what type of renovation you’re doing and the scope of the project. It may be smart to start small and take on less expensive projects first. Read these strategies to build your savings.
Review more information about our loan options and speak with one of our mortgage representatives. They are here to help you evaluate which option is best for you and how much you will be able to borrow. To learn more about mortgages and home lending, check out our other blogs.