NATION – It’s important to weigh your options for financing home improvements you can’t pay for outright.
Many people have been spending more time at home since the start of the pandemic, and that’s inspired a lot of people to update their homes. If you’re thinking of renovating this year, you’re in good company. Home remodeling is expected to take off in 2022, according to the Joint Center for Housing Studies of Harvard University. In fact, annual owner improvement and repair spending could reach $430 billion by the second half of the year.
If renovating your home is high on your list of priorities, there may be one thing holding you back – money. Raiding your savings to pay for home improvements isn’t a good idea if doing so will leave you with limited cash reserves for emergencies. That’s why it pays to look into these affordable financing options for remodeling. Following are options for paying for home improvements:
- Personal loans: Personal loans let you borrow money for any purpose, and you can take one out to finance home renovations. To qualify for a competitive rate on a personal loan, you’ll need strong credit. That’s because personal loans are unsecured, so they’re not tied to a specific asset. As such, lenders are already taking a risk they may not get paid, but the higher your credit score, the less risk there is.
- Home equity loans: With a home equity loan, you borrow a lump sum of money and repay it over time, as you would for a personal loan. Home equity loans are secured by the properties whose equity is being borrowed against. This can be a good thing and a bad thing. The upside is that it’s fairly easy to qualify for a home equity loan as long as that equity is there. And your credit score may not be as much of an issue when it comes to getting a home equity loan. But if you fall behind on your loan payments, you could risk losing your home. That said, you might snag a lower interest rate on a home equity loan than a personal loan. That could, in turn, make it so you’re less likely to fall behind on your payments.
- HELOCs: With a HELOC, or home equity line of credit, you get access to a credit line you can draw from within a preset period of time – usually five to 10 years. HELOCs are more flexible than home equity loans because you don’t have to commit to borrowing a lump sum. They’re often a good option for financing home renovations because sometimes, you can start a project only to encounter extra costs as you go. Like home equity loans, HELOCs are secured by the homes being borrowed against. They can be more affordable than personal loans from an interest rate perspective, but they also tend to come with variable interest rates, which means your HELOC payments could rise over time.
- Cash-out refinancing: With a cash-out refinance, you borrow more than you’re remaining mortgage balance and get the difference in cash. Even though mortgage rates have climbed recently, you’re still likely to pay less interest on the sum you borrow with a cash-out refinance than with a personal loan, home equity loan, or HELOC. That said, a cash-out refinance requires you to get a whole new mortgage, and that can be a lengthy process. Plus, you’ll be charged closing costs to refinance your home loan, and those could be substantial.
How will you pay for renovations? If you’re eager to improve your home, be sure to consider the pros and cons of your various borrowing options before moving forward. Remodeling can be rewarding, but it pays to do your best to make it as affordable as possible.
- BPT
