Home improvements are often expensive, but they can be worthwhile if you get to enjoy increased comfort while you live in your home and reap financial benefits when you eventually sell it. If you don’t have enough cash saved to cover the cost of a project, there are several ways to finance it.
Using Home Equity
Equity is the current value of your home minus the amount you owe on the mortgage. If you have enough equity, a lender may allow you to tap into it to finance a home improvement project.
One option is a home equity line of credit, or HELOC. This is like a credit card, in that you could use money in a variety of amounts at different times, up to your credit limit. You might only need to pay interest in the early years of the repayment period and pay back the principal later. HELOC interest rates vary depending on market conditions, and you might also have to pay fees.
Another way to take advantage of your equity is to obtain a home equity loan and borrow a lump sum all at once. You would have to pay origination fees and closing costs and make monthly payments that would include a combination of the principal and interest.
Be cautious about using your home equity to finance improvements. If your house lost value because of changes in the market, you could find yourself with little or no remaining equity. If you used your home as collateral and couldn’t pay back the money you borrowed, you could wind up in foreclosure. Before you use a HELOC or home equity loan, make sure you have an emergency fund since you wouldn’t be able to use your equity for an emergency if you had already used it to finance home improvements.
Borrowing From the Contractor
Some contractors offer loans to their customers, usually through a third party. The terms vary by lender, and the interest rate depends on the borrower’s credit score. Depending on your circumstances and the lender’s terms, you might or might not get a better deal from a contractor loan than you would by accessing your home equity.
A contractor might also offer a loan that is interest-free if paid off within a fixed timeframe. That could be an attractive option if you knew you’d be able to pay it off quickly, but if you didn’t do so in time, you could be charged a high interest rate on the entire balance.
Make a Smart Decision
Some home improvements add much more value than others. Consider the amount of money you could expect to recoup from renovations, how long you plan to live in your home, how important the upgrades would be to you during that time, and your current financial circumstances to figure out if the project you’re considering would be worth it. If the answer is yes, look at a variety of financing options and make sure you understand the terms and possible implications of each.
This article is intended for informational purposes only and should not be construed as professional or legal advice.
