Spending more time at home the past few years has inspired many homeowners to revamp their surroundings, but the high demand for materials, coupled with supply chain issues, has led to an increase in costs for remodeling. Fortunately, there are options for those looking to finance their home upgrades:
Borrow against home equity
There are a few ways for homeowners to borrow against their equity. A home equity loan, sometimes called a “second mortgage,” allows homeowners to borrow against the equity they’ve built. The money is paid out in one large sum, which is repaid over a set amount of time. It’s worth noting that home equity loan payments are due in addition to any existing mortgage payments, so the homeowner should ensure their budget can handle the increased monthly cost.
A home equity line of credit, or HELOC, is another way for homeowners to borrow against their equity. With a HELOC, a homeowner is preapproved for a credit line up to a certain amount and over a set term (called the draw period). Much like a credit card, the borrower uses only what they need from the total limit. Once the draw period is over, borrowers enter the repayment period where they must pay back the loan plus interest. HELOCs often come with variable interest rates and could lead to unpredictable payments.
Take out another type of loan
Homeowners have loan options that aren’t tied to the equity of their home. For example, they can apply for a personal loan to use for renovations. These are unsecured loans and the interest rate and approval rely heavily on a borrower’s credit score, so good credit is a plus. Personal loans are typically for smaller amounts than home equity loans and have shorter repayment timelines.
If a homeowner has a permanent life insurance policy — such as universal or whole life insurance — and they’ve built up enough cash value, they may be able to borrow against that cash value. This money may be used however the borrower chooses, including for home renovations.
Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.
Use a credit card
Although using an existing credit card could be the quickest way to finance renovations, homeowners should be mindful of any high interest rates that could increase monthly payments, especially given the high costs of home renovations. Another option is to open a new card or use a balance transfer card with a zero-interest introductory offer. However, if the balance isn’t paid by the time the offer expires, borrowers will likely be subject to high interest rates on the remaining balance.
Pay with cash
Paying with cash is the most straightforward option. Paying with cash also means homeowners won’t have to worry about interest rates or using their homes as collateral. However, paying out of pocket requires a lot of advance planning and saving, and can mean waiting a long time before starting the project.
If a home improvement project is costly and will take a long time to save for, homeowners may choose to complete the renovation gradually, making small improvements little by little as cash becomes available. Homeowners also have the option to pay for part of the project with savings and consider other sources of funding for the rest.