Whether you’re looking to update outdated bathrooms, install modern appliances for your kitchen, or remodel the exterior of your home, the initial finances of remodeling a house come as the first challenge.
So, what are the different ways you can afford to update your home, and what are the benefits?
Cash or Credit
Some home renovations, such as painting a bedroom or installing new lighting fixtures, can be affordable without financing help. Small upgrades that range from a few hundred dollars to a thousand dollars might be best to finance through saved up cash that you’ve set aside for home improvement.
If you plan to finance your home remodel with a credit card, ensure that you’ll be able to pay it off before an interest rate starts adding to the money you owe.
Using cash is less of a hassle than paying a credit card back, but using a credit card can help you build credit. Here is a list of credit lines that have a 0% introductory APR for the first 12 to 18 months, which can help with the initial repayments.
If you’re planning on a bigger project such as upgrading your roof or updating your kitchen, then a personal loan is another option to choose from. Applying for a personal loan can be done through a bank, credit union, or online lender.
Just consider your credit score (which must be in good standing), decide on a lender, and calculate which loan payment plan works best for you.
Home Equity Loans
A home equity loan is essentially a second mortgage. Say that you put a down payment of $30,000 toward a home that has a value of $200,000. You are then left with $170,000 to pay off, including interest and fees.
You are allowed to borrow against your own payment of that $30,000 by taking out a home equity loan. By doing so, you are essentially borrowing money against yourself.
A home equity loan can be used to pay for any home improvements. While investing in your home’s value can allow you to own more of your home in the long run, consider the finances before deciding on a home equity loan. Home equity loans typically offer lower interest rates and fewer fees, but this also adds another monthly payment to your original mortgage.
Without weighing your ability to juggle a second mortgage, you could be left with more debt to pay off and the possible risk of losing your home if payments aren’t made on time.
Home Equity Line of Credit (HELOC)
A home equity line of credit is another common way to finance home improvements. HELOCs are different from loans because they involve a revolving line of credit in order to pay for large expenses. Instead of taking out the full amount of money lended, you can use what you need until the loan life has ended.
HELOCs also don’t have a fixed interest rate (otherwise known as a floating rate), and instead change according to the underlying reference rate.
You can also use a large line of credit such as a HELOC in order to consolidate some debt. These are very similar to credit cards.
Another way to finance a home remodeling project is through a cash-out refinance loan. A cash-out refinance involves taking out a new loan equal to the amount of cash you want to withdraw plus the remaining balance.
Based on how much equity a homeowner has paid off on their mortgage, they can then use that equity as cash for home improvement projects. This can be helpful because it allows you to combine your home mortgage loan and a loan for home upgrades into one payment plan.
If you decide that you’d like to finance your remodel by refinancing your home, Seattle Mortgage Planners is here to help by walking you through the refinancing process and answering any questions you have. Schedule a quick phone consultation with us to get started!