home improvement financing

Strapped for cash? 5 ways to finance your home improvement on a budget

Bethany Ramos DIY, Home Improvement, Homeowners

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Reading Time: 5 minutes
March 22, 2019.

It’s no secret that home improvement projects can be expensive. Plenty of people have to postpone getting their home remodeled because of the price tag. But if you know what you’re looking for, you’re going to find several good options that you could use to finance your home upgrades — and stay within your budget.

5 ways to turn your dream home into a reality this year

home improvement financing
Home-improvers spend an average of $6,649 on their upgrades. So, you’re in good company. An easy way to make your project a success (and avoid overspending) is by planning it out in advance and finding a financing option that makes sense.

Here’s how it’s done:

1. Use a 0 percent interest credit card.

If you have a small home improvement project, then you may want to consider using your credit card first. You can easily get a credit card with a low or zero percent introductory interest rate if you have a decent credit score. Typically, you won’t have to pay interest for 12 to 18 months. So, if the project isn’t overly large, then you’ll have the money to pay off the card in around a year. This is one of the easier options. Plus, you may also get a bonus from the card company after meeting their purchase requirement. Every little bit helps.

Before you get a credit card, you’ll need to make sure you understand all of the terms and conditions. One of the benefits of using a credit card is that you don’t have to put up any collateral. You may also be able to pay for your entire remodeling project without any interest.

However, you’ll have less time to pay off the credit card if you want to avoid paying interest. There are no tax benefits.

2. Use a personal loan.

It’s a good idea to use a personal loan if your home remodeling project costs between $15,000 and $50,000. One of the great things about personal loans is that you can get one without having to put up any collateral. You’ll also have more time to pay back a personal loan. In fact, you may have several years to pay it back.

But unsecured personal loans typically have higher interest rates. The term rates and interest rates can vary greatly. That’s why it’s a good idea to shop around before you choose a personal loan. You want to make sure that you understand all of the terms and conditions so you don’t have any surprise fees. Also, you won’t get any tax benefits.

3. Take out a home equity loan.

A home equity loan is a second type of mortgage that you take out in your home. You’ll make payments over a set number of years. The payments are equal. The value of your home will determine how much money you’ll be able to get.

Home equity loans typically are limited to 85 percent of what your home is worth. For example, if your home is worth $300,000, then the maximum amount that you can get is $255,000.

There are several advantages that come along with getting a home equity loan:

  • You’ll be able to get a larger loan amount than you would if you were to get a personal loan or use your credit card.
  • You may also be able to get a lower interest rate.
  • You could qualify for tax deductions. You’ll likely qualify for a tax deduction if your first and second mortgage equals less than $750,000.

Granted, there are risks that come along with getting a home equity loan. You’ll reduce your equity if you take out a home equity loan. You’ll also risk losing your home if you can’t make the payments. And, you’ll have to make payments for a longer period of time.

There may be additional fees that you’ll have to pay along with the interest rates. These fees include application fees, prepayment fees, appraisal fees, late fees, and credit reporting fees.

Curious? Ask your lender about what’s possible — it’s more than you think.

4. Take out a home equity line of credit.

A home equity line of credit (HELOC) is a line of credit secured by your home. Your equity will determine how much you’ll be able to borrow. Because you’ll have a revolving line of credit, a HELOC works a lot like a credit card.

You have the option of getting a HELOC with a variable or fixed interest rate. The amount of time that you have to pay back the loan can vary. Typically, you’ll have between 5 and 15 years to pay back the loan.

The interest rates on a home equity line of credit are also normally higher than the interest rates on home equity loans. But you probably won’t have to pay any closing fees. You may have to pay an annual fee to keep the HELOC open. If your home value decreases, then you may end up owing more than what your home is worth.

5. Consider cash-out refinancing.

If you refinance your mortgage, then you’ll be replacing your old mortgage with a new one. Refinancing your mortgage could allow you to take advantage of lower interest rates. It also allows you to borrow extra money.*

Check out this example of how cash-out refinancing can work:

  • Your home is $200,000.
  • You still owe $100,000.
  • Your home has $100,000 in equity.
  • You want $50,000 to remodel your home.
  • You can get a new loan for $150,000.
  • The amount that you borrow will be added to the balance of the loan.

You can potentially have to up to 30 years to pay back the loan. You will have to pay closing costs. You may also lose your home if you can’t make the payments.

If your home equity’s gone up, now’s the time to use it

Home equity gains slowed down recently, but that doesn’t change the fact that 2018 was a big year for homeowners. Last year, homeowners saw home equity jump 9.4 percent, with a nationwide increase of $775.2 billion. Last year, cash-out refinances also hit their highest point since the financial crisis of 2008, making up 77 percent of total refinances. For many homeowners looking to stay put and upgrade, the benefits far outweigh the risks. Talking to a loan officer can help you count the costs, find out exactly how much you can cash out, and make a smart decision.

Kim Harington is a freelance content writer for several local businesses in the Jacksonville, Florida, area, including Suddath Moving & Relocations.

*While refinancing could make a significant difference in the amount you pay each month, there are other costs you should consider. Plus, your finance charges may be higher over the life of the loan.

For educational purposes only. Please contact your qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.

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