Home remodeling is an opportunity to fix long-lasting issues, update various features or entire rooms, and ultimately increase a home’s overall value. That being said, very few home remodeling projects are cheap, let alone affordable, which leads owners to wonder how they can best finance such an endeavor without succumbing to a substantial financial burden in the process. Remodeling projects are popular here in The Bay Area due to extremely low interest rates and borrowing costs for financing home renovation projects.
In this article, we will discuss how people can finance a home remodeling project and how the project itself can determine which option is best. Each has its advantages and disadvantages, so it’s important to know how all of your options work and the gravity of the remodeling project before coming to a financing decision.
Cash Out of Pocket
When it comes to ways people can finance their remodeling projects, this is the option that is often left out, but it is one of the most important to note.
Paying for a home remodeling project out of pocket with cash is arguably the best option since it eliminates most of the contractual hoops you would have to go through for other financing options.
When a homeowner finances a project out of pocket, they don’t have to worry about any hidden fees, interest rates, credit checks, or various other factors that typically come into play when financing through other sources listed here. Instead, they can pay for the entire project upfront and know that there is no lasting financial burden they have to carry over time.
Although paying out of pocket often requires the homeowner to save a substantial sum over a long period, they won’t be indebted to anyone with this option. Many sources also believe this helps homeowners stick to a budget better since they are only using the money they have rather than money they’re receiving elsewhere (making it easier to just keep borrowing a little more).
While we concede it is unlikely most people can finance an extensive home remodeling project this way, if you can even pay for a few elements within the room out of pocket, such as the sink or the tiles, etc. you’ll be far better off than borrowing money for the entire project.
Next to paying out of pocket for the project, one of the lowest risk options to finance a home remodeling is to acquire a personal loan from reputable sources.
Personal loans can be acquired from banks, credit unions, and online lenders, allowing homeowners to obtain up to $100,000 to finance their home remodeling project. One of the most significant benefits of this option is that homeowners rarely have to provide assets for collateral; they just have to accept that they will be paying significant interest rates on the loan.
As you’ll find with most options on this list, there isn’t a perfect scenario for obtaining a personal loan; they have several advantages and disadvantages homeowners should be aware of. In terms of advantages apart from the ones already mentioned, making consistent payments on your loan can help strengthen your credit, and not having to provide collateral means the company can’t take anything from you if you don’t make a payment, you’ll pay a late fee.
However, on the other hand, these loans aren’t easy to obtain, especially if you’re asking for a hefty sum. Most individuals won’t obtain a personal loan for their home remodeling project unless they have exceptional credit, allowing them to acquire the loans at reasonable rates. If you’re lucky enough to pass and obtain a personal loan from one of these sources, you should recognize that:
- There is nearly always a substantial interest rate for the loan (3-16% on average)
- Most loans must be paid within five to seven years
- Monthly payments will be higher than compared with other options
Because personal loans have a shorter repayment time frame, monthly payments are usually pretty high (exceptionally so if you’ve borrowed a large sum that has a high interest rate). Therefore, homeowners need to heavily way this option and consider if they are financially capable of repaying their personal loan in the allotted period or not.
If you only need a small sum that you can’t pay out of pocket ($5,000, for example), this is probably one of the best options for you. But if you need tens of thousands of dollars or more, you’ll want to do some extensive math and budgeting to see how financially feasible this is for you.
If you’ve exhausted your options trying to obtain a personal loan to finance your home remodeling project, your next step might be to turn towards another relatively low-risk option: credit cards.
Similar to personal loans, credit cards rarely require any form of collateral once acquired; however, they are much easier to obtain. Ultimately, most sources only recommend using credit cards to fund small, lower-cost home remodeling projects due to their lower limits of $5,000-$10,000 and high interest rates.
As far as financing options go on this list, credit cards can be the best and equally worst options. It all depends on what you use them for and how quickly you can pay them off.
Several credit cards are interest-free in the first few months after acquisition listed as a 0% introductory APR. This is perfect for people who don’t have the money for their remodel upfront but know they can pay it off within a few months. If they can get it all paid before the interest-free period ends, then they won’t have wasted any additional money on interest fees.
Additionally, if you acquire a credit card with additional perks and rewards, such as travel credits or cash back, then using it for these projects will benefit you even more later on. However, it is important to recognize the significant risks of using credit cards for these projects.
Using a credit card to finance your home remodeling project can be a dangerous game, especially if it is a pricy project. Currently, nearly half (47%) of U.S. adults, or about 120 million people, have credit card debt, with the average American family’s debt amassing to $6,270. Once you use your credit card to finance a project, you could be on a slippery slope to substantial credit card debt that might end up taking more from you than if you’d opted for an alternative financing option.
If you’ve borrowed a substantial amount of money that is subjected to a high interest rate, you could find it quickly increasing as you struggle to keep up with payments. This is why most sources avidly state that credit cards should only be used to finance small home remodeling projects that the homeowner can pay off quickly and with minimal to no additional interest fees.
A popular way people will finance their home remodeling projects if they’ve owned the home for a while is through refinancing their mortgage.
Also referred to as refinancing your home, this process replaces a home’s current mortgage with a new mortgage that usually includes a shorter repayment period, lower interest rates, and more manageable monthly payments.
Refinancing a home’s mortgage is an extremely popular and financially beneficial decision homeowner will make after they’ve paid off a decent chunk of their home or have owned it for several years. The process often allows them to save a substantial sum monthly they can later use to finance home remodeling projects.
A common alternative is a cash-out refinance which allows a homeowner to replace their existing mortgage with a new loan that is more than they owe on their home. They would then acquire the difference in cash to use for their remodeling.
Of course, the ability to do this relies heavily on:
- How much equity you have in your home
- Your credit score (higher scores yield lower interest rates)
- Your debt-to-income ratio
- The rates available and the length of the terms you want
- Fees, expenses, or closing costs associated with refinancing
- Tax implications
- Whether or not you will require private mortgage insurance
While this is an exceptional option, it isn’t wise to refinance your home purely to obtain some extra cash for remodeling. You’ll want to ensure this is a financially sound decision for you first. That being said, if you were already considering refinancing your mortgage, this is an excellent opportunity to fix up some things in your home you’ve been hoping to do for a long time.
Home Equity Line of Credit (HELOC)
One of the most effective and commonly used options on this list is undoubtedly using a Home Equity Line of Credit (HELOC) to borrow money from lenders.
A HELOC is essentially a loan homeowners acquire from lenders, such as banks, that will grant them access to cash based on the overall value of their home. The benefit of these loans versus a personal loan or credit card is that they have lower interest rates and can allow you to obtain substantial sums (up to 80-85% of your home’s worth) for your remodeling projects.
The biggest source of homeowner wariness when it comes to a HELOC is that the lenders only grant you so much money at low-interest rates because they use your home as collateral. This means that if you miss payments on the loan, the lender is within their legal rights to repossess your home to cover their losses. Therefore, the stakes are much higher with this option.
To ensure your home isn’t repossessed, it is vital homeowners understand how a HELOC works. Ultimately, there are two periods: a draw period and a repayment period. The draw period typically lasts ten years and is the only time you can withdraw funds to finance your projects. Afterward, you enter the repayment period, which lasts about 20 years, where you are no longer allowed to withdraw any money, and you must repay what you’ve borrowed in full, including interest fees, before the end of the period.
As long as the amount you owe on your home is less than the value of your home, and you’re confident you can make these loan payments on time, a HELOC is one of the best options for acquiring large sums for big remodeling projects.
Home Equity Loan
A common contender with a HELOC is a home equity loan, which is a completely different option despite the many similarities it shares with HELOC.
There is much a home equity loan has in common with a HELOC, such as the fact that they use your home as collateral and can allow you to borrow substantial sums to be paid over a lengthy period. However, one of the biggest differences between the two is that a home equity loan is provided in one lump sum rather than the homeowner withdrawing various amounts over a ten-year period.
Home equity loans are often referred to as second mortgages and are offered with fixed interest rates that aren’t subject to market fluctuations. Homeowners usually have anywhere from five to 30 years to repay their loan that might come with higher interest rates than a HELOC but nowhere near a credit card’s rates.
Overall, this is a decent option for similar reasons to a HELOC, but homeowners should be aware that they have less payment flexibility with this option, and the risk of losing their home if they fall behind on payments is very real.
Before you settle for any of these other options and resign yourself to lengthy payment periods or high interest, it might be worth your while to see what assistance you can get from a government loan.
The United States government has a series of loan options homeowners can take advantage of in order to finance their remodeling projects. Some of the most popular programs include:
- The FHA 203(k) loan offered by The U.S. Department of Housing and Urban Development (HUD)
- Title 1 Property Improvement Loans offered by HUD
- The Home Style Renovation Mortgage offered by The Federal National Mortgage Association (Fannie Mae)
- Cash-out refinance loans offered by Veteran Affairs
All of these options can help homeowners save substantial amounts of money on interest and insurance while still obtaining upwards of $25,000 to remodel their home.
Of course, the catch is that you must qualify for these loans first, and many come with strings attached. For example, the Title 1 Property Improvement Loan must be used alone or in conjunction with the 203(k), and any remodeling financed by the Home Style Renovation Mortgage must be completed by contractors approved by the mortgage lender.
About Element Home Remodeling East Bay
Element Home Remodeling East Bay is a home remodeling contractor based in Oakland, California. We design and build modern and open designs and have a reputation in The Bay Area for the quality of our work and customer service. Contact us today to schedule a free consultation.
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