All homeowners eventually look to renovate their home. Here are some considerations for how to finance it.
Whether you are looking to finish the basement or add a swimming pool, most large projects to renovate your home will need some level of financing. Finding the best financing option will depend on how urgently the project needs to be complete, your desire to control costs and whether you can chip in with a little sweat equity yourself.
How Soon Do You Need It?
If your home renovation is past due for completion, and you need to source your financing quickly, a personal loan may be the answer. To obtain an unsecured personal loan, you can likely apply and get approved within the same day. Banks are more than happy to expedite loan applications for personal purposes.
The financial benefits of personal loans are that they typically have minimal or no fees for taking out the loan. The rate of interest on the loan is usually fixed, and that helps with budgeting your monthly payment. A fixed rate means that for the lifetime of the loan, your payment will always be the same. With a fixed rate and a predictable repayment schedule, you will know exactly how long it will take to pay back the loan, and that may help define the scope of the renovation you are prepared to take on.
Rates, Fees And Your Ability to Repay
The financial downside to an unsecured personal loan is that the interest rate you will be charged for it will be higher than a loan that is secured, such as home equity line of credit (a.k.a HELOC). A heloc is secured by the value of your home. If you obtain a heloc and fail to repay, the bank can seize your home because it is the asset securing the loan.
The other financial downside to an unsecured personal loan is that typically banks will only approve relatively small amounts, such as about $25,000.00. Depending on the scope of your home renovation, $25,000.00 may not be enough money to get the job done. If that is the case, you will need to consider the option of obtaining a home equity line of credit.
Home equity lines of credit typically have a variable interest rate. The reason for this is because with a larger amount, banks want to hedge their bets against the volatility of changing rates. Were heloc rates fixed, a bank might regret loaning you a large amount if rates go up significantly in the future.
Home equity lines of credit typically do not have a fixed repayment schedule. That flexibility is very beneficial if you are planning to repay your home renovation costs on an expected future infusion of cash. Between now and then, you can choose to only pay a minimal amount against the balance of the heloc.
The downside to a flexible payback schedule is that if you lack the discipline to attack the outstanding loan balance, a heloc can stay with you for longer than you originally planned. Most home equity lines of credit even have the flexibility to allow you to withdraw amounts against the available credit. If you are not careful, you might dip into the loan over time, and instead of paying it off you actually cause its balance to grow. If you fear your own discipline with respect to a flexible loan, you may want to steer clear of a home equity line of credit.
The other downside to a home equity line of credit is that in order to apply for one, you typically need to have your home's property value assessed. Banks will organize the assessment of your home, but they will charge you a fee. In some areas, getting your home assessed might run you $400.00 or even more. Depending on the size of your renovation project, $400.00 may be too steep a cost to include if you want to stay within your budget.
Finance Your Renovation Like a Pro With a Little Sweat Equity
By sweat equity, I'm really referring to the sweat of organizing a portion of your home renovation yourself as opposed to having your contractor do it. By offering to purchase your supplies yourself, you may be able to use a credit card that has rewards for purchases you make. Considering the supplies for a home renovation will likely be a very large purchase amount, a credit card with a 2% cash back reward system might result in some pretty big dollars coming back your way.
For example, if your renovation supplies cost $25,000.00, then with a 2% cash back credit card, you will receive $500.00 just for making supply purchases yourself. Considering you're going to spend the $25,000.00 regardless, you might as well get paid $500.00 to organize it yourself. With $500.00, you can pick up a very nice big screen TV to watch the game in your newly renovated home. To boot, that TV even ships for free!
Speaking of free delivery, many big box stores offer free delivery when you purchase more than $50 worth of goods (which you probably will) so you'll be able to save on those costs. Your contractor should also be willing to reduce his or her fees because sourcing supplies and delivering them to your home is time and money they no longer need to spend. If you're having trouble finding a credit card with good rewards, you may want to check out the Capital One Spark Cash card, which has 2% cash back on all purchases. It even has a $500.00 cash back bonus for purchases over $4,500.00 within the first 3 months. That bonus could be perfect for a home renovation, and instead of that very nice big screen TV for $500.00, you could pick up an amazing leather recliner for lounging with the $1,000.00 you would get in cash back rewards from the Spark Cash card.
Summary
The best way to finance your home renovation depends on how soon you need the job done, the long term costs you can bear, and how much you can personally contribute to the project. If you need the project done yesterday, a personal loan is the fastest way to fill your financing gap. You may be able to save more money overall with a home equity line of credit if your home renovation project is large enough and the interest rates you pay are favorable over time. But if you really want to finance your home reno like a pro, you need to check out whether you can take advantage of cash back rewards on a new credit card.
Have you ever financed a home renovation and received cash back in the process? What other financing options have you considered for renovating your home?