How do I pay for home improvement?

When you are thinking of renovating your home, this is not only an opportunity to give the place a new look, but also a chance to increase its resale value.

When you’ve saved enough money, you can tap into those savings to pay for home improvement. But waiting until you have money to renovate isn’t always realistic or even wise.

This is where financing options come into play. Many people make use of their home equity, which is simply the difference between the value of their home and what they owe on their mortgage (assuming the former is greater). You can do this with a home equity line of credit, or HELOC, or a home equity loan. Other options are taking out a building loan or refinancing from the disbursement.

“In general, any option is fruitful as long as the outcome is profitable,” says Sam Kwak, a real estate investor and entrepreneur.

That’s the key part of the equation when you’re borrowing or spending money to do home improvement. Will these improvements come at a higher price when the time to sell – enough to pay for the investment? Failure to take this into account would be a mistake.

“A lot of people tend to upgrade certain aspects of their home without thinking about whether that adds value to the property,” says Kwak.

5 ways to pay for home improvement

Before deciding on your home improvement project, see if the renovation will add value to your property. The process should include researching comparable home sales in your area and contacting professionals such as real estate agents and / or licensed contractors to get their opinion on the price of the renovations and whether they will be in the long term.

Calculating these numbers will tell you whether it makes financial sense to keep going.

If house prices are rising in your neighborhood, that’s good news for you, says Kwak. Rising prices increase your home equity, and the more equity you have in a home the better, as it can be a good source of funding if you want to fund improvements.

But you have to be selective about which projects you choose. Spending on something isn’t a guarantee that your home will improve in value, especially if it’s a relatively small but still expensive project.

“Unfortunately, a lot of people add $ 10,000-20,000 and the value barely moves. It’s great to have sentimental value, but from a purely financial perspective, I’d say it’s a bad decision to do, ”says Kwak.

There are also repairs that sometimes require immediate attention. A good example of this is an aging HVAC system. Turning a blind eye to a problem like this can turn into a bigger and more expensive problem later on. If you’re not sure how urgent a repair is, contact a licensed contractor or home inspector.

Once you’ve considered all of the above and are planning on moving forward with your home improvement project, here are five ways to get the cost covered.

1. Cash

Cash is the easiest payment method for home renovations. They will not increase your aggregate debt and you will not pay any loan fees, let alone interest. If you choose to go down this route, you can start saving by creating an automated savings plan, possibly with a high-yield savings account.

Don’t use your savings to renovate, however, as maintaining a healthy emergency fund is more important.

Cash is the most common form of payment for home improvements, but according to a 2019 study by the Joint Center for Housing Studies at Harvard University, the use of home equity or other forms of finance increases with the cost of the improvements.

People paid in cash for 78% of the improvements that cost less than $ 10,000, but only 60% of those that cost $ 10,000 to $ 49,999 and 54% of those that cost more.

After savings, the most common sources of funding for large home improvement projects are home loans or lines of credit and refinancing, data from Harvard University’s Joint Center for Housing Studies shows.

2. Home Equity Line of Credit (HELOCs)

If you can’t or don’t want to pay cash, a home loan or line of credit is usually the cheapest financing option if you qualify. Interest rates tend to be lower because the loan is backed by your home as collateral, says Kwak.

“I generally recommend a HELOC over a home loan. Most HELOC rates these days can be anywhere from 2-5%, ”says Kwak.

A HELOC works like a secured credit card with a revolving credit line up to a defined maximum. That means you can take what you need, when you need it. Depending on your creditworthiness and the value of your home, a HELOC can be issued for up to 85% of your home value.

But a HELOC comes with a major caveat: you need to have enough home equity. Before considering a HELOC, compare the value of your home to what you still owe on your mortgage. Generally, you are eligible if you have at least 20% equity in your home.

You must also have a credit score of at least 620 to qualify and at least 720 to get the best interest rates.

“If you put $ 20,000 in a new project and get $ 50,000 worth of home ownership out of it, that’s hot business,” says Kwak.

3. Home loan

Another option that should be considered is a home equity loan, which many are calling a second mortgage.

Home equity loans and HELOCs are both based on home equity, but function very differently. With a home loan, the amount you borrow is paid out in advance as a lump sum, just like a personal loan. Your interest rate is fixed and you have a certain amount of time to repay the loan.

As with a HELOC, this type of loan uses your home as collateral; the lender can repossess it if you default on the loan. The disadvantage of a home loan is that you have less payment flexibility than with a HELOC. A home equity loan requires you to borrow a large sum at once; With a HELOC, you can borrow and make payments on the go.

4. Home improvement loans

If you don’t qualify for a HELOC or home equity loan, you can apply for a home improvement personal loan from a bank, credit union, or online lender. It’s one of the worst ways to pay for home improvements, however, says Dan Moralez, mortgage officer and regional vice president at Northpointe Bank in Michigan.

In this case, you don’t need to put your home on as collateral, but the interest rates may be higher because the loan is unsecured. With a construction loan, your interest rate and your qualifications depend on your creditworthiness and the financing is quick. These types of loans usually have shorter repayment terms, lower loan amounts, and fewer fees.

“The problem with a personal loan is that you generally pay a higher interest rate and you usually have an expedited repayment period because there is no collateral,” says Moralez.

If you are planning on using a personal loan to finance your renovation, these are better suited for small to medium-sized projects such as B. upgrading kitchen appliances or replacing windows.

5. Cash out refinancing

A cash-out refinance replaces your original mortgage with a new mortgage that is worth more than you owe on your home, so you can pocket the difference.

You can use these extra funds to pay for your home improvement, but you will only be able to get a cash out refinance if you have enough equity in your home.

When considering refinancing, the disadvantages should be considered. Since you are resetting the terms of your mortgage, you will have to pay the closing costs such as appraisal, property fees, and taxes. Remember, these costs can be built into the loan so you don’t have to come up with the money upfront.

In general, cash-out refinance is only attractive if you get a lower interest rate than you are paying now, says Carol Reed, a Realty Group real estate agent in Minnesota. Interest rates are so low right now that “it’s hard to argue against cash-out refinancing for someone with a mortgage loan above 4.0% to 4.5%,” she says.

“If you refinance at our current rate, there is a very good chance that you can cash out and still have a similar monthly payment to what you have now,” says Reed, “and you can use that money to pay for home repairs and grow the equity of your home or any other type of investment. “