How to Finance a Home Improvement Project
— Written by Andrew Rombach, a content associate from LendEDU – a consumer education resource and personal finance authority.
There are many advantages to embarking on a home improvement project. Making well-thought out upgrades will raise the resale value of your home and will help turn it into a worthwhile investment. Plus, home improvement projects are fun and will make your home a more enjoyable place to live.
The downside of these benefits is that home improvement projects don’t come cheap. Most homeowners have to figure out a way to pay for them, and it takes a lot of time and planning to see them through to completion.
If you can’t pay for the project on your own, there are many financing solutions to help you out. This article explains three financing alternatives as well as some of the benefits and drawbacks of each.
Open a Low-Interest or High Signup Bonus Credit Card
One of the best things about credit cards is that many offer a signup bonus. When you spend a minimum amount within a few months of opening the card, you receive a one-time cash bonus.
With the right card, you may be able to cover the home improvement project, and the project expenses may qualify you for the introductory cash reward bonus – effectively a discount. Some cards offer a low APR for the first year. If you can secure a low rate, that is an added benefit for anyone who is relying on credit.
Taking advantage of reward cards could be the right strategy if you’re disciplined and able to pay your balance in full. However, this means you’ll have another credit card to manage and pay bills for. You should understand the risks associated with credit cards early on.
If you don’t pay your balance off in full, you will be on the hook for interest payments – which can be substantial, especially if you are stuck paying the minimum. Furthermore, consumers with poor credit may have a hard time qualifying for cards offering the best rates which adds to the risk.
Dipping Into a Home Equity Line Of Credit
If using credit card rewards doesn’t feel like the right choice, taking out a home equity line of credit (HELOC) may be a better solution. With a HELOC, you can use the equity in your home as collateral and borrow a certain amount of money.
A HELOC is similar to a credit card in many ways. Instead of receiving one lump sum, you have access to a line of credit. So you only take out as much as you need.
Another advantage of a HELOC is that it comes with a much lower interest rate since the loan is secured by your equity. Plus, you have the potential for a high loan amount if the project requires it.
Most banks will require that you maintain a loan-to-value ratio, usually around 20 percent. So let’s say your house is worth $200,000 and you have $75,000 in equity. That means you can borrow up to $35,000 on your HELOC.
There are downsides associated with a HELOC. First, you’ll need to have a decent amount of equity in your home for this to be an option. And remember, if you do qualify, your home is on the line if you’re unable to repay the loan.
Taking Out a Personal Loan
Depending on your credit history, taking out a personal loan could be a good option. The application process is usually straightforward, and the funds are dispersed fairly quickly – in a matter of days in some cases.
Unlike a HELOC or credit card, you’ll receive a lump sum of money all at once with a personal loan (or installment loan). These loans are usually unsecured, so you won’t have to use your home or another asset as collateral. For those with great credit, personal loans may come with low interest rates, making them an enticing option for home improvement expenses.
However, there are still risks associated with installment loans. You’ll be on the hook for a repayment plan immediately after taking out the loan paid out in monthly installments. Missing a payment would cause problems down the road for your finances. Plus, borrowers with poor credit history might get stuck with a high interest rate.
If you have a high credit score and are certain you can manage the monthly payments, taking out a personal loan or installment loan might be worth it. Make sure you research all your options and find a lender who will offer you the best rates.
Conclusion
Most people would love to be able to make improvements to their home. And home improvement projects can be a great idea since they typically increase the resale value and make your home more livable. Make sure you select your projects carefully, and pick those improvements that you’ll both enjoy and see a return on your investment.
However, you should go into home improvement projects from a comfortable financial position. Don’t get yourself into a situation where your monthly budget is stretched and there is no wiggle room. You don’t want to add on more debt than you can manage or take on extraordinarily high interest rates. Sometimes, it’s worth it to wait until your finances are more stable and put aside money each month to use for a future project.
(This is a guest article written by Andrew Rombach of LendEdu, a website that helps consumers learn about and compare financial products, including student loans, personal loans, credit cards, insurance products, banking products, and more).