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How to Pay for Home Renovations

Let’s be honest: Home renovations are expensive. Though a simple half-bath remodel costs just $5,000, a high-end kitchen renovation can cost upwards of $65,000. If you don’t have the cash to bankroll your project, you’ll need to secure financing.

Popular financing avenues for home renovations include:

  • Saved cash
  • A home equity loan
  • A home equity line of credit (HELOC)
  • Credit cards/personal loans
  • Cash-out refinancing

Choosing the lending option that is best for you depends on the project you’re tackling and how much time you need to pay back the money. In this guide, we provide more information about each financing tool and list the pros and cons of each.

SAVING CASH FOR HOME RENOVATIONS

Cash is king, especially when it comes to affording home renovations. Though stowing away enough money to fund a major remodel takes time, it can save you thousands of dollars in interest and other fees.

But there are downsides to funding your home’s makeover with cash. You might be waiting months or even years to rustle up enough money. Also, by earmarking your cash, you could be missing out on higher-yielding investment opportunities.

PROS OF SAVING CASH FOR RENOVATIONS:

  • Eliminates the need for debt, saving thousands of dollars in interest and fees
  • Mitigates the risk of foreclosure
  • Keeps renovations within the scope of the budget

CONS OF SAVING CASH FOR RENOVATIONS:

  • Takes time to save for large projects
  • It may not be possible to save enough money to renovate a very old home
  • By reserving cash for a renovation, you miss out on higher-yielding investments

HOW TO SAVE MONEY FOR HOME RENOVATIONS

Some homeowners jumpstart their savings with inheritance while others liquidate assets like stocks, bonds, and even vehicles. But there are many different ways to save money in a hurry. 

Generally, it’s recommended that homeowners:

  • Determine the approximate cost of the renovation needed
  • Decide when the renovation will be completed
  • Divide the cost of renovation by the number of months available to save for the renovation
  • Evaluate current monthly expenses, cutting unnecessary costs (e.g. entertainment, subscription services, dining out)
  • Consider alternative means of generating additional income each month

SECURING A HOME EQUITY LOAN FOR RENOVATIONS

A home equity loan, also called a second mortgage, allows homeowners to borrow a lump sum against the equity in their home. This loan has a fixed interest rate and is amortized over five to 20 years.

Equity is calculated by dividing your mortgage balance by your home’s current market value. A lender will use an appraisal to determine the latter. They’ll also reference your credit score and payment history to determine the loan terms.

A home equity loan is a popular financing tool because it allows homeowners to unlock their hard-earned equity. However, it’s risky. Since the home is used as collateral, the homeowner risks foreclosure if they don’t repay their debts.

PROS OF A HOME EQUITY LOAN FOR RENOVATIONS:

  • Cash is withdrawn as a lump sum
  • The interest rate is fixed with set terms and payment schedules
  • The interest rate is typically lower than other financing avenues 
  • You can pay off the loan faster or possibly refinance the loan at a lower rate

CONS OF A HOME EQUITY LOAN FOR RENOVATIONS:

  • If the borrower defaults, the lender could take the home
  • The interest rate is usually higher than the primary mortgage 
  • Encourages irresponsible borrowing and spending
  • If the home’s value decreases, you could end up owing more than the home is worth

USING A HOME EQUITY LINE OF CREDIT FOR RENOVATIONS

A home equity line of credit, or HELOC for short, is a revolving line of credit that uses your home as collateral. It’s similar to a home equity loan, but with two key differences:

  • A home equity loan provides a lump sum while a HELOC offers a revolving line of credit over a five- to ten-year period. HELOCs work very much like credit cards in that regard.
  • A home equity loan comes with a fixed interest rate. However, a HELOC typically has a variable interest rate. That means payments fluctuate based on market conditions.

A HELOC is a good choice if you’re unsure of your budget and don’t want to be responsible for a large amount of consumer debt. It can also serve as a buffer for those who have the cash to pay for renovations but need a little extra to finish the work.

PROS OF A HELOC FOR RENOVATIONS:

  • You won’t have to pay any closing costs
  • HELOCs offer lower interest rates than credit cards or personal loans
  • The interest paid on a HELOC is tax-deductible
  • Borrowers can use the money for anything, not just home renovations

CONS OF A HELOC FOR RENOVATIONS:

  • Since your home is collateral, defaulting could result in foreclosure
  • A variable interest rate could spell trouble during periods of inflation
  • Many lenders charge an early termination fee
  • If the home’s value decreases, you could end up owing more than the home is worth

TAPPING CREDIT CARDS FOR HOME RENOVATIONS

Generally, credit cards are a bad idea when it comes to financing home renovations. Credit card debt is unsecured, so lenders can charge high interest rates. Plus, failure to pay may result in bankruptcy.

So, when are credit cards a good idea?

  • If you have a no-interest or low-interest credit card
  • If you have a home emergency and don’t have time to secure financing

If a dire situation forces you to rack up credit card debt, don’t despair. You can easily consolidate debts at a lower interest rate using a home equity loan. You can also refinance with a balance transfer card, which essentially moves the debts to another credit card with a lower interest rate.

PROS OF CREDIT CARDS FOR RENOVATIONS:

  • Convenient and readily available in an emergency
  • Many credit cards offer cash-back rewards
  • You can pay off the balance over time
  • Responsible use can build credit

CONS OF CREDIT CARDS FOR RENOVATIONS:

  • Very high interest rates, sometimes as high as 25%
  • Credit cards encourage irresponsible spending
  • Defaulting on credit debt could result in bankruptcy 
  • Some credit cards have hidden fees

CASH-OUT REFINANCING FOR HOME RENOVATIONS

Compared to a traditional mortgage refinance, which simply changes the interest rate or loan term, a cash-out refinance grants homeowners a larger loan. With this larger loan, you can pay off your original mortgage and then pocket the difference.

A cash-out refinance is a savvy borrowing tool because, unlike with a home equity loan, homeowners are left with just one mortgage. They can also secure a loan with better terms. However, the cost to refinance can be fairly pricey – about 2-6% of the final loan amount.

PROS OF REFINANCING FOR RENOVATIONS:

  • Debt is consolidated into one monthly payment
  • Homeowners can secure longer payoff terms relative to other financing options
  • Closing costs can be rolled into the loan
  • After closing, homeowners walk away with a lump sum

CONS OF REFINANCING FOR RENOVATIONS:

  • A cash-out refinance results in a higher monthly mortgage payment
  • Closing costs and other fees are pricey
  • Closing takes 30 to 60 days, which means that homeowners must wait for their money
  • If the home’s value decreases, you could end up owing more than the home is worth

GET YOUR DREAM HOME WITH PORTICO

Bankrolling home renovations can be stressful. If you don’t have the time or income to save enough cash, you’ll need to borrow money. However, since many loans have high interest rates and require that you use your home as collateral, you shouldn’t jump into financing blindly.

At Portico, we specialize in helping clients create their dream homes with minimal worry. Understanding that money is often a concern in home renovation projects, we guarantee transparent pricing and always work within your budget.

Interested in learning more? Contact us online or call us at 704-742-2720 today!

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