Sooner or later, every home needs a facelift. But it can be tough to fund home renovations if you don’t have cash to spare. Financing home renovations can be difficult, if not impossible, if you don’t know what strategies to use.
That’s what this guide is for. Read on to discover a few home renovation financing tips and methods that you can use to fund home improvement projects.
A cash-out refinance could be the ideal solution to your home renovation woes. When you take out a cash-out refinance, you take out a new mortgage loan for your property that has a higher balance than the current mortgage.
You then pay off the remaining amount of your original mortgage and pocket the difference. With that money, you can finance any home renovation you have in mind.
However, cash-out refinancing does have some drawbacks. For example, you have to borrow more money for your new loan, so it will take you longer to fully pay off your house and build up 100% equity. Furthermore, some cash-out refinance loans have higher interest rates or other strings attached, like extra fees.
For this financing strategy to be successful, you need to read the fine print carefully and be sure not to sign for a loan that won’t work for your personal finances. Certain lenders may cover closing costs or offer good financing options, so it's important to explore your options and check out credit unions and banks for the best deals.
To further take advantage of your home’s equity, try a home equity line of credit. With this, you open up a credit line using your home’s equity as collateral, and you can borrow up to a certain dollar amount based on your original contract. Whenever you borrow money from that line of credit, you pay it all at once or with monthly payments.
Home equity loans, or a second mortgage, give you a lump sum for the balance of the loan agreed upon; whereas HELOCs allow you to draw on the allotted amount as necessary. For a HELOC, if the total amount accessible is $80,000, you may choose to only draw $10,000, giving you access to cash and flexibility as you need it. You take out a loan with your home's current equity as the collateral, so you'll lose it if you default on the loan.
Of course, the downside is that home equity lines of credit and loans can put your home at risk if you can’t repay the money you borrow. Even so, borrowing money against your home to improve its property value or equity is something that many homeowners appreciate.
You can also take out a different loan for your home renovation. A personal loan, for example, may allow you to take out as much money as you need to install a new deck or backyard pool, then pay it off over time.
So long as the personal loan has low fees and a low interest rate, you shouldn’t have too much trouble paying it off, particularly once your renovation project is done. Things you will need to consider for a personal loan include: loan amount, loan terms, whether it’s secured or unsecured, etc. Some loans have good fixed interest rates, while others offer variable rates and repayment terms.
By the same token, you can open up a new line of credit or take out a new credit card. All of these methods allow you to borrow only as much money as you need for the renovation without dipping into your home’s equity and potentially risking your homeownership status. Depending on the type of loan you choose for your home remodel, you could have a lower interest rate than you expect, especially with a good credit score.
Still, it's often easier to use your home's equity to renovate your property, particularly if you have a low credit score or other budget limitations. Overall, it may be a good idea to see what your loan and credit card options are before using your home's equity.
Balance Homes is a co-ownership solution with a mission to help American homeowners stay connected to the homes they love by offering a flexible alternative to traditional financing when life circumstances change. Our model also focuses on long-term financial health and education, helping homeowners understand their options, manage their equity, and build a plan that fits their needs.
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Sources:
Cash-out refinance vs. home equity line of credit | Bank of America
How a Home Equity Loan Works, Rates, Requirements & Calculator | Investopedia
What is a home equity line of credit (HELOC)? | Bank of America
What is collateral on a loan – and when do you need it? | CNBC
