Home improvement projects may increase a property’s resale value, accommodate a changing family, or simply make a house feel more like a home. Common renovations include repairs, additions, and upgrades, which all require unique time and financial commitments. Before embarking on a new project of any size, homeowners should take the time to understand the costs and financing options. The following considerations could help a homeowner build a practical plan for a dream home renovation.
Plan Out Your Project and Budget
The first step in planning a home improvement budget is identifying the exact objective of the renovation. It’s usually a good idea to start with an ambitious goal and narrow it down based on needs and restrictions.
A realistic scope of work should reflect the project’s financial and practical value. For example, a family deciding how many square feet their nursery addition should be might consider the impact of the room’s size on the house’s resale value and whether a larger room would work well for their growing family’s needs.
Once the scope of work is established, it’s time to set a budget. Basic costs may include materials, tools, and labor. Choosing less expensive materials and doing some projects without professional help may drastically cut costs. However, mistakes can be costly and dangerous, so it’s important to weigh advantages and risks. A project’s budget may also reflect incidental costs, like moving into a hotel or ordering food during renovation.
Exploring Financing Options
Sometimes, homeowners may have enough saved to cover a renovation project upfront. However, it’s not always feasible to rely on savings. Fortunately, several financing options could help fund home improvement projects.
Cash-out Mortgage Refinancing
Cash-out mortgage refinancing refers to replacing an existing mortgage with a new larger loan that exceeds the remaining mortgage balance. Homeowners obtain the new mortgage by tapping into their home equity, the portion of the home’s value they’ve already repaid. Funds that exceed the mortgage balance could pay for renovations.
Ideally, favorable home refinance rates may offer homeowners who refinance a lower interest rate. Borrowers typically need consistent income, significant equity in their home, and good credit to qualify.
Pros
- Mortgage interest rates may be lower.
- Borrowers don’t have to manage an additional loan or monthly payment.
- Borrowers can use the cash however they deem fit.
Cons
- Cash-out refinancing reduces a person’s equity in their home, which could affect their financial security.
- Refinancing comes with closing costs, including origination fees and more.
- Taking out a larger mortgage increases debt.
- Borrowers risk losing their homes if they default.
Home Equity Loans
Home equity loans, sometimes called “second mortgages,” allow homeowners to access extra money by borrowing up to a certain percentage of their home equity and receiving a single lump sum payment. Home equity loans are secured loans; borrowers must put their homes up as collateral. Borrowers repay the mortgage through fixed monthly payments throughout the loan’s term. Lenders usually require high credit scores and significant equity in one’s home.
Pros
- Home equity loans often have high borrowing limits, making them a good fit for major projects.
- Fixed interest rates mean predictable monthly payments for the lifetime of the loan.
- If the loan funds a home improvement project, interest may be tax deductible.
Cons
- Borrowers risk losing their homes if they default.
- The entire loan amount accrues interest, even if borrowers don’t use it all.
- Borrowers may owe a large sum, known as a balloon payment at the end of their terms.
Home Equity Lines of Credit
Home equity lines of credit (HELOCs) are similar to home equity loans. Both allow homeowners to borrow against their homes and require significant equity. Unlike a home equity loan, however, a HELOC is a type of revolving credit. Borrowers are approved for a credit limit that they can tap into as needed throughout the loan’s borrowing period. During the repayment period, borrowers pay back the loan in monthly installments. HELOCs have variable interest rates, unlike home equity loans, so payments may fluctuate.
Pros
- Borrowers only owe interest on the amount they spend.
- Interest may be tax deductible if the loan goes toward home improvement projects.
- HELOCs have flexible repayment options.
Cons
- Borrowers risk losing their homes if they default.
- Variable rates mean unpredictable payments.
- It’s easy to go over budget with access to a line of credit.
Personal Loans
Many lenders, like banks and credit unions, offer personal loans for home improvement projects. These loans are unsecured, meaning they don’t require any collateral. Personal loans often have smaller maximum borrowing amounts than secured loans, making them suited to smaller projects. Qualification and interest rates typically depend on an applicant’s credit score and their income.
Pros
- Personal loans don’t require collateral.
- Borrowers may receive funds within days of approval.
- Lenders don’t require significant home equity.
Cons
- Personal loans often have higher interest rates than other options.
- The maximum loan amounts tend to be smaller than secured loans.
- Repayment terms may be short.
How to Choose Your Financing
Choosing between financing options doesn’t have to be overwhelming. Many lenders offer prequalification, which can show borrowers the terms and rates they’re likely to qualify for. Comparing those offers can help homeowners identify financing options that align with their current needs and long-term goals.
The best fit often depends on the following factors:
- Project size. Personal loans and cash-out refinancing options often offer smaller payouts, so they may not be the right fit for extensive projects.
- Homeowners who need money quickly for emergency repairs may consider personal loans since they have minimal processing time.
- Flexible options like HELOCs may be best suited for projects with many variables.
- A homeowner should consider credit history, income, and home equity while weighing options.
- Depending on an applicant’s financial background, some options may offer better interest rates, lower monthly payments, or fewer fees than others.
Planning for Repayment and Budgeting
Before homeowners begin the renovation process, they should have a plan for repaying their home improvement loan. That could include building savings and reducing debts in advance to make room in the budget for a new loan payment. With enough savings, homeowners could minimize the amount they borrow for renovations. Paying down debts could also improve credit scores and help homeowners secure better loan rates.
Homeowners could save a lot of stress by updating their monthly budgets to reflect the new loan payments as soon as possible. By setting a realistic budget and sticking to it, homeowners can enjoy the fruits of their home improvement projects without worrying about repayment.
Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.
