Whether you’ve lived in your home for a long time or you just moved in, you might be making plans to start doing some renovations. Maybe you’d like to update the kitchen or finish the basement.
However you want to improve your home, it’s smart to start thinking early about how you’re going to pay for it. Fortunately, there are a handful of different options from which you can choose. As you consider each, think about your situation and needs to pick the right one.
In an ideal scenario, you’d be able to afford your renovations through income and savings. By saving up enough cash, you not only avoid having to borrow money with interest, but you also get to avoid potential negative impacts on your credit score.
The only downside here is that it can take a while to save up the amount of money you need, especially if it’s a big project. One way to get around that is by breaking up your renovation project into smaller projects.
For example, let’s say you want to renovate the kitchen, including:
- Upgrading the countertops
- Replacing the cabinets
- Getting a new sink
- Replacing your old appliances with new ones
Instead of saving up for all of these expenses at once, save up enough to complete one and do the work; then, save up for the next one. This can take a while, but you’ll avoid debt.
Most importantly, avoid dipping into your emergency fund to pay for home improvement projects. Unless it’s an actual emergency, leave the money where it is.
2. Home equity loan
If you’re a homeowner and have significant equity in your home — that’s the value of the home minus the loan amount — you could qualify for a home equity loan.
A home equity loan is a secured loan that uses your home’s equity as collateral in case you default. You can generally borrow as much as 80% to 90% of your home’s equity.
The biggest drawback to using a home equity loan is that if you default, the lender could foreclose on your home. Also, home equity loans require an appraisal of your home and charge various closing costs. So, the lower interest rate may not make up for the higher fees.
All in all, home equity loans are best if you have a massive home improvement project planned and are having a hard time finding enough cash any other way. Just keep in mind that you need sufficient equity in the house to get approved.
3. Home equity line of credit
A home equity line of credit (HELOC) is similar to a home equity loan in that it uses your home’s equity as collateral. The main difference is that a HELOC is a revolving loan that you can use, pay off, and use again.
A HELOC typically charges variable interest rates and has all of the same drawbacks as a home equity loan. It may be a good choice, however, if you have a lot of little projects and will have an ongoing need for credit. Just borrow what you need, pay it off, then borrow again for the next project and so on.
4. Zero percent APR credit cards
If your home improvement project is relatively inexpensive, it might be worth getting a credit card with a 0% introductory APR promotion. Some of the top 0% APR cards offer promotional periods as long as 18 months, giving you plenty of time to pay off your balance.
Some 0% APR credit cards even offer rewards on your purchases, and possibly even a sign-up bonus. So, not only do you not have to pay interest if you pay it off before the promotion ends, but you could also get cash back or travel rewards while you’re at it.
In other words, if you want to get the most bang for your buck, 0% APR credit cards could be your best bet. Just be sure to have a plan in mind to repay the debt before the promotional period ends. Otherwise, you’ll likely end up with a double-digit interest rate.
5. Personal loans
If none of the other options sound good so far, consider getting a personal loan to fund your home improvement project.
Like credit cards, personal loans typically don’t require collateral, which means you won’t lose your home if something goes wrong and you can’t make payments. Also, personal loans have set repayment schedules, so there’s less room to be irresponsible like there is with credit cards.
The main shortcoming to consider is that personal loans typically charge higher interest rates than the other options we’ve discussed. Unless you pay off the loan early, you could end up spending a lot more on your project by the time you’re done.
But for some, the pros outweigh the cons, so still consider it.
What’s next for you
For many people, cash is the best way to pay for home improvements. But it’s not necessarily the most accessible option. As a result, it’s essential that you consider each option carefully.
Look at different 0% APR credit cards and personal loan companies, for example. Speak with a mortgage officer to find out how much a home equity loan or HELOC would cost you. As you do your research, you’ll learn enough about each option to pick the right one for your needs and your preferences.
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