4 ways to finance your home renovations
Are you making improvements to your home? Ideally, you will be able to pay cash to fund your upgrades. But repairing or renovating often costs a significant amount of money, and you may need to borrow to cover the costs.
The good news is that there are different ways to finance home renovations, each with their pros and cons. Here’s what you need to know about four possible financing methods so you can decide which one is right for you.
1. Cash-out refinance loans
Cash refinance loans involve obtaining an entirely new mortgage. You’ll apply for a new home loan for more than you currently owe and spend the difference on your renovations. For example, if you want to do a $ 20,000 home improvement project and currently owe $ 200,000 on your home, you will apply for a refi loan of $ 220,000.
A cash refinance loan can be a great choice if you can also reduce the interest rate on your current mortgage. The savings from refinancing and lowering your interest rate may mean that your monthly payment doesn’t go up that much. You could even cover some of the home improvement costs with the interest you save over time.
Choosing a cash refinance loan also means that you will only have to make one monthly payment, instead of paying your mortgage. and another loan. Refusal withdrawals usually carry lower interest rates than other types of loans, even home equity loans. And if you itemize, the interest on your entire borrowed amount should be tax deductible (on mortgages up to $ 750,000).
These factors all make cash-out refi loans an ideal choice. But the downside is that you are putting your house at risk. If you can’t make payments, you could face foreclosure. You will also have to pay closing costs when refinancing, just like you did with your original mortgage.
When you take equity out of your home, if your property’s value goes down, you may owe more than your home’s value. This could prevent you from selling or refinancing unless you can find the extra money to pay off the balance.
These are big drawbacks and you would be taking a big risk, so think carefully about the suitability of this option.
2. Home equity loans
Home equity loans also allow you to tap into the equity in your home, but won’t affect your current mortgage. You can use a home equity loan or a home equity line of credit (HELOC).
A line of credit allows you to borrow Up to a certain amount, but it works much like a credit card. If you get approved for a $ 20,000 HELOC, you can borrow up to that amount, pay off some or all of your debt, and then borrow again. These loans usually have variable interest rates. Home equity loans, on the other hand, involve taking out a loan for a fixed amount – and you should be given the choice of a variable or fixed interest rate.
HELOCs and other equity loans generally have lower rates than personal loans or credit cards, but the rate will generally be higher than that of a cash refinance loan. And the rules for deducting interest are more complicated. You also assume the same risks as those associated with a credit redemption, since you are putting your home in danger.
A home equity loan or line of credit would make more sense than a cash refinance loan if you cannot benefit from a lower refinance rate. With rates near record lows right now, however, many people could lower their interest costs by refinancing, which might be a better choice.
3. Personal loans
Personal loans do not require you to use your home as collateral. Indeed, with an unsecured personal loan, you do not have to build up assets to guarantee repayment. You can borrow simply on the strength of your repayment promise.
The interest rate on personal loans is usually lower than the rate you would get with a credit card. But the rate is higher than refis or equity loans since the lender takes a greater risk by lending you. Interest on personal loans is also not tax deductible. That said, it can be easier and cheaper to apply for a personal loan. Cash refinance loans and home equity loans may require you to pay appraisal fees and other closing costs.
4. Credit cards
Credit cards can be a much more expensive way to borrow than personal loans, equity loans, or cash refinance loans. But it’s not always the case. For example, you might qualify for a card that offers a 0% promotional interest rate for a period of time. In this scenario, a card might be the cheapest option, as long as you can afford the cost of the upgrades before the promotional rate expires.
Credit cards, like personal loans, are unsecured debt, so you don’t risk foreclosure if you default on your payment. That said, non-payment always has consequences and it’s not a good idea to take on debt that you’re not sure you can pay off.
If you plan to rely on a 0% APR card to fund upgrades, it is essential that you are sure that you can pay off the balance before the standard card rate applies. Otherwise, you could end up paying interest at a very high rate. and your interest charges would not be tax deductible.
You could even earn credit card rewards when you charge home improvement purchases to your card. But be aware of the considerable risk of owing money at a high rate. And if you use a card to the max to pay for home renovations, it could also affect your credit score in the short term, as it will impact your credit utilization rate.
Ultimately, as you can see, there are pros and cons associated with all of these choices. Consider your repayment schedule, how much you need to borrow, and your tolerance for risk before deciding which option is best for you.