Your home is usually the single greatest investment you will ever take on. Anywhere between $100,000 and $600,000 is a huge sum for most people, so maintaining that and ensuring that it appreciates in value is important for your long-term financial security. Maintaining that investment often means periodic remodels and updates that are no cheap task, even if done by yourself.
Renovating your kitchen, adding a deck, changing outdated fixtures, improving heating or even adding a room or level can be as much as you paid for the home over the time when it all adds up. This means that finding the right financing option for your financial situation is important to ensure you can stay in the home without leveraging too much of your overall equity.
One major fallback is when homeowners finance their projects for longer than the improvements will last, so remember to plan our your projects with long-term budget goals in mind so you don’t keep paying for projects long after they are worn and need more updating. Luckily there are a number of options to be thoughtfully considered.
Cash: As they say, Cash is king, and with construction that is certainly true. This method won’t have future payments and won’t get in the way of any of your home’s value or equity. This can usually mean doing many small projects at a time. This means you must prioritize your project but it will leave you with a more measured and sensible approach.
Refinance Your Mortgage: For homeowners who are going to benefit from refinancing this is the best option. If you can lock in a low rate that always helps. Currently, the average rates for 30-year mortgages are 4.44% while it is 3.9% for the 15-year mortgage. Be sure to not spread the cost of the improvements over more years than the renovation will last.
Home Equity Line of Credit: A home equity line of credit is good for those who already have a good first mortgage. As long as you make minimum monthly payments you can secure these loans by drawing out money as you need and paying it back at your own speed. These are usually good for 10 years and are sometimes renewable. You also won’t have to pay interest until you use the money. However, you must make payments or you could lose your home.
Home Equity Loan: With this loan, you can borrow a fixed amount and pay a fixed payment over a specific amount of time. 5 years and 30 years are possible, but 15 years is the typical term. The rates are usually higher but they are fixed, so your long term plan will be locked in for this loan.
Construction Loan: Generally construction loans are short-term loans and you must refinance into a traditional mortgage loan once the home or renovation is complete. These must be managed and the money is released at various stages of the work being done. They are a good option for when you are building a major addition or new building that would be worth more than the assets you have already.
Credit Cards: Credit cards are becoming more and more popular as people want to cash in on the reward systems they offer. However, these often cannot handle larger budgets so this is usually a good option for small projects. Interest rates for cards are also much higher so be careful with that projects you put on your card.
Borrow From 401(k): With this option you some plans allow you to take 5-year loans from your 401(k), which comes as a payroll deduction. You pay the interest to yourself, though that may not be as much as you have earned if you had left the money. Also, remember that if you leave your job the money becomes due immediately.
Federal Housing Administration 203k Loan: While these are usually used to purchase a home with major repairs, they can also be used for refinancing. You can also get a Streamlined 203K program that will lend up to $35,000 for less complicated projects.
FHA Title 1 Loan: These are loans o up to $25,000 for home improvements that are insured by the federal government and available from approved lenders at market rates. These terms are usually up to 20 years, and the homeowner does not have to have equity in the property.
Reverse Mortgage: For those over 62 you can get a reverse mortgage based on a percentage of the equity you have in your home. You aren’t required to pay them back until the home is sold or you move. These are more expensive than refinancing though.
Contractor Financing: These are a last-ditch effort, only if the contractor has a relationship with a finance company. These are usually not a great idea because they are expensive to borrow this financing.