Whether you love the house you are living right now and just want to make it more functional and attractive, or you have bought a fixer-upper you plan to slowly improve; you need money to make your home improvement magic happen.
If your project is a little one (such as painting a powder room or building a bookcase), you will not need a lot of cash.
But if you plan to replace all your floors at once, gut and remodel your kitchen, or create a master suite; you will need to spend as much time evaluating your financial options as you do on Pinterest and other stores and websites.
When undertaking a major home renovation, your first priority should be creating and adhering to a budget that is honest and realistic. If you want a stainless steel, humidity-controlled fridge with panorama French style doors, plan for it. You can find average project costs online to give you some sense of what to expect.
Financing options for home improvement projects
Do your homework and project how much your project might cost you by talking to a contractor to get a basic idea. Then look around to price the appliances, fixtures, and other finish materials. This will only give you preliminary numbers.
Cash. If you have plenty of savings set aside, you can pay cash for your renovation. However, paying for a home improvement project with cash means you lose the ability to invest that money, and you reduce your available cash for emergencies or retirement accounts.
Credit card. If it is a big project, a credit card could be your worst option. Most likely, you will be paying high interest until you can pay off the balance, which will add considerably to the longterm cost of the project. However, if you can pay off the balance quickly (within a month or two) and have a credit card on which you earn rewards, this might be even beneficial. One more option would be a credit card with 0% interest for 12 to 18 months on purchases, as long as you can pay in full before interest accrues.
Unsecured Financing. Some construction companies offer no interest options of 18,24,or 36 months. Some stores also offer those plans for buying your finish fixtures and materials.
Short-term loans. Banks and credit unions offer personal loans that can be secured or unsecured and repaid with interest over 24 to 60 months. The interest rates vary but are typically lower than credit card interest rates if you have good credit and it depends on the amount of the loan also.
Home equity loan. A home equity loan offers low interest rates and the ability to write off the interest payments on your federal income taxes, but you need sufficient equity (at least 5%— 10% and sometimes 15%—20%) and good credit to qualify. The only downside of a home equity loan is your home provides the collateral for the loan, and if you cannot repay the loan, you could lose your home in a foreclosure.
Cash-out refinancing. If you have owned your home for a few years, have paid down your home loan balance and the property has increased in value, a cash-out refinance may be a good option. Keep in mind your payments may go up even if your interest rate is lower, because you will be increasing the size of your loan to include the cash you take out for your home improvement project.
FHA Loans . In addition to conventional refinancing, you can look into an FHA 203k loan , which lets you wrap the costs of your renovation project into your mortgage. This is a governmentinsured loan that allows you to buy a home that is in need of major repairs and/or renovations. The repairs can be structural and/or cosmetic in nature. The lender loans you the money to buy a home and complete repairs in a single mortgage; or you may use it for home improvement.
The financing option you choose for a home improvement project should be one that fits your budget now and in the future, and your choice should also limit the amount of interest you will pay for your home improvement.