As a homeowner, you don’t have to save for a new faucet. Nonetheless, you should plan a budget and save for building an entirely new bathroom.
Earlier, financing your big home improvement projects meant going to the bank, consulting a loan officer, and hoping for the best. However, things have changed today. If you consult a mortgage broker, you will be presented with more than 200 different loan programs, including home equity lines of credit to cash-out refinancing and 401K loans.
Nevertheless, brokers are just one of the many lenders you can get a loan from. Additionally, depending on your credit history, you might be able to lend more money than you anticipate. But with so many home financing options, how do you find the right fit.
Here are five easy ways to finance home improvements.
Paying cash is perhaps the simplest way to finance home improvements—you save till you have enough money for the project. The best thing about this option is that, unlike a loan, you don’t have to pay any interest.
One thing you should be wary of is that saving up for small projects, like a half bath or a new sink, might be fairly easy. Depending on your income, you will be able to save cash for home renovations really quick. However, saving enough money for larger projects in a timely manner will prove to be difficult.
2. Renovation Financing
Renovation financing might be your best bet if you have very little equity. Though it is similar to cash-out refinance, rather than basing the loan on your home’s current worth, it bases it on what it will be worth once the renovation is over.
Under renovation financing, you will have to refinance your current loan by adding an additional amount to it that’s required for the home improvement. Instead of paying you, the lender pays the contractor when the work is in progress. This way, the bank can make sure the collateral is secure.
Renovation financing is excellent because it helps you boost your home value while spreading the additional mortgage over the loan term. As a result, the balance and monthly payment of your home loan will typically rise.
3. Personal Loan
Much like a payday loan, personal loans happen to be a great alternative to putting your home up as collateral. What’s more, you might not even have to put up any of your assets for collateral. So, what’s the catch?
You need good or excellent credit to qualify for these loans at the best rates. With personal loans, the interest rates tend to be higher than equity financing. The time frame to repay the money will also be shorter, ranging between five to seven years. However, the shorter repayment window means you will have larger monthly payments to deal with.
4. Home Equity Loan
A home equity line of credit, aka HELOC, lets you borrow against the equity or ownership you already have in the home. Often, lenders allow you to borrow around 85 percent of your home’s total value.
HELOCs involve two phases, first the draw phase and then the repayment phase. The draw phase is when you will get to access the funds and pay only small, interest-only payments. Once the draw period ceases, the repayment phase begins. During this stage, you will not be able to tap into additional funds, and you will be asked to make regular principal and interest payments until the amount your borrowed is fully repaid.
The interest for home equity loans generally varies. However, it is a great option as it allows you to access renovation financing when you need it. You are paying for what you use. So it makes an ideal fit for both small projects and big renovations.
5. Credit Cards
Credit cards, as you might already know, allow you to purchase things when you don’t have cash up-front. What’s better, a few credit cards give you rewards for every dollar you spend. Nevertheless, ensure you pay off your balance quickly as credit cards often come with higher interest rates than the other types of financing options mentioned here.
Before You Finance
You won’t be able to borrow dollar-for-dollar for a home renovation project. But, through a home renovation project, you are improving your home as well as your quality of life. So, ensure your project will give you the bang for the buck.
Additionally, you should also research the lender to ensure they are experienced in the loan type they offer and the one you want to leverage. Your lender should also be reputable. With the right lender, you will have to provide a lot of paperwork, but that is a good thing.