How to Find the Right Financing Option for Your Home Renovation
There are several ways to pay for your home improvement project. Which one is right for you? That depends on a range of factors, including project cost, your household budget, how much you’ve saved, and how soon you plan to start work. This checklist of pros and cons can help you choose the financing option that best fits your budget and your project.
Option No. 1: Pay cashPros:
If you’ve saved money to pay for the project, or received a big tax refund or work bonus, paying cash may be a good option. You won’t take on any more debt and you’ll have immediate access to the money, unless it’s tied up in a certificate of deposit or an investment account.
Unless you’re a super saver, it could take years to save enough to pay for a large project like a kitchen overhaul, which can cost $50,000 or more.
Option No. 2: Pay with your credit cardPros:
If you have a low-interest credit card or a 0% balance-transfer option, you can also consider paying with a credit card. You won’t have to go through a lengthy approval process, especially if you’ve already been approved for the card.
Many contractors won’t accept credit card payments. While you can get a cash advance through your credit card, the interest rates are often very high. If you’re using a card with a limited-time, low introductory interest rate and don’t pay off the full balance before the offer ends, you’ll face much higher monthly payments and end up paying a lot of interest on the remaining balance. In addition, the length of introductory offers is usually only a year or a year and a half, which gives you a very tight time frame for paying off the debt.
Option No. 3: Get an unsecured personal loanPros:
In contrast to credit cards, an unsecured loan—also known as a personal loan—can have a fixed interest rate and a fixed monthly payment. This type of loan does not require you to put up your house as collateral, so your home is not at risk. And, you can still qualify if you haven’t built enough equity. The application requires minimal documentation, so the process takes just a few minutes. And, you’ll receive your money in a few days. In addition, there are no closing costs and you usually have several years to pay back the loan.
Interest rates for unsecured loans can be higher than those for home equity or other secured loans, which means you pay more interest over the life of the loan. You cannot deduct loan interest from your taxes.
Option No. 4: Take out a home equity loanPros:
If you have equity in your home, a home equity loan or line of credit can help you pay for a more expensive project. These loans usually have lower interest rates, and you may be able to deduct the interest and any points on your income taxes as well. In addition, you may have longer to pay back the loan—anywhere from five to 30 years.
This type of loan is also called a secured loan. That means your house is collateral for the loan and, if you don’t pay it back, the lender can take your home. It can take six to eight weeks to complete the application process and receive your money. Though the interest rate may be lower, the fees can add up. You’ll pay closing costs—including the cost of an appraisal, attorney’s fees, title search charges, and more—which can add up to several thousand dollars. The amount you can borrow will also be limited to a percentage of your home’s value minus any current mortgage.
Before you decide how to pay for your home improvement project, think about which option best suits your budget, the amount you need to borrow, and how soon you’ll need the money. Doing so will help to ensure that you get the loan that’s right for you.
This article is intended to provide generalized information to assist the general public in making financial decisions; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.