How to Finance Home Improvements
People remodel their homes for different reasons. Some do it to fix safety issues or add a new space while others do it to provide more comfort or add value before selling it. Whatever the reason, home improvements are a big undertaking.
But the biggest assignment is knowing how much the project will cost and how you’re going to finance it. And given that prices of home renovations may be steep, we’ve compiled several financing options you can leverage to make it a success.
Ways to Pay for Your Home Remodeling Project
Your individual needs determine how you pay for your home improvement project. Financing options at hand include:
Smile buddies, your savings are going to save you a big deal—no interest, no paperwork to fill out! This makes savings the cheapest way to pay for your home improvements. But only feasible for small projects.
However, taking a low-interest loan rather than tapping savings for your home improvements is better. Instead, invest your savings somewhere you can earn a return on investment.
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2. Government Loans
If you qualify, a government loan could save you interest and insurance costs. But it only covers upgrades that improve your living conditions, like making structural repairs for safety purposes.
Common government loans include:
- HUD Title I Property Improvement Loan. The maximum you can borrow is $25,000 and repay within 20 years.
- USDA single-family housing repair loans and grants. You can borrow up to $40,000 at an interest of 1% for up to 20 years. Low-income households in rural areas are highly eligible while persons over 62 years can receive grants.
3. Home Equity Line of Credit (HELOC)
A HELOC is a relatively low-cost loan for home renovations if you have enough equity. It’s offered at banks, credit unions, and other lenders.
How does HELOC work?
First, lenders calculate how much you qualify for using your home’s value minus the amount you still owe on your mortgage and credit history.
The HELOC loan is wired directly to the contractors as either check or debit transaction. And you pay the amount borrowed in installments with interest.
HELOC is viable when you’re not sure how much the home improvement will cost. You can click here to see what you need to put in place before getting underway with home improvements.
4. Federal Housing Administration 203(k) Renovation Loan
An FHA 203(k) is a construction loan that puts the cost of property purchase and renovations in one basket. For renovations, funds are held in escrow and released when the project is complete.
You can apply for this loan through an FHA-approved lender (the cost of your renovation should at least be $5,000) and be able to find contractors to bid for the project before the loan closes.
Renovation starts after the loan closes. Contractors are paid using the renovation funds held in escrow. You should consider FHA 203(k) when you’ve low income, a lower credit score, or want to combine the cost of renovation with the purchase of a property
5. Cash-out Refinancing
Replacing your existing mortgage with a new one is a good deal. And cash-out refinancing is best at that, but your home must have a bundle of equity. Your income and credit history also determine how much you qualify for.
In cash-out refinancing, you take a larger loan than you already owe and receive a percentage of your home’s gained value in cash.
However, the maximum loan-to-value of cash-out refinancing is 80%, meaning you can only cash out up to 80% of the value of your home. For accuracy and reliability, a calculator will help you calculate your cash-out refinancing value.
6. Personal loan
A personal loan is an ideal option if you’re looking for extra coins to finance your home improvement project. Personal loans have less upfront fees and can be repaid faster than full refinance.
You can get a personal loan from banks, credit unions, or other lenders. The amount you can borrow depends on your credit score.
Most people consider personal loans if they don’t want to use their home as loan collateral or their equity for HELOC isn’t enough.
7. Credit Card
Last on our list is using a credit card to finance your home improvements. It’s a convenient method when the project in question is small.
You can take advantage of the 0% introductory interest rate on a new credit card to finance your project. You’ll incur zero costs if you repay the loan within the introductory period.
However, if such a plan fails, you’ll be hit with interest rates ranging from 16% to 24% or higher. Having big debts on your credit card is expensive and can prevent you from accessing other low-interest loans.
Is Financing Home Renovations Ideal for Me?
No matter the reasons, home renovations are a big step. And you can decide to finance your home’s improvement based on its condition and convenient loan options that suit your needs. Fortunately, you can look at the financing options we’ve discussed and choose one that is best for you and your home.