Other Ways To Pay For Home Improvements
Getting a personal loan for home improvements isn’t the only way to cover this big expense. If a personal loan isn’t what you had in mind for your home improvement needs, then explore the other options on the table.
A credit card might be the most accessible way to pay for your home improvements. That’s especially true if you already have a credit card in your wallet with a high enough limit. You won’t need to fill out another loan application. Instead, you can start covering the costs with your plastic right away.
But there’s a big downside to using your credit card for a home improvement loan. That’s the high interest rates associated with credit cards. That higher interest rate can mean paying much more in financing costs for the same home improvements.
If you need to get the ball rolling on home renovations immediately, consider credit cards as a temporary solution. But look for a more permanent option in the form of a loan with lower interest rates.
Home Equity Loan
A home equity loan is essentially a second mortgage loan that is based on the equity you’ve built in your home. Equity is the difference between your home’s current value and your outstanding mortgage balance. So, if you own a $250,000 home and still owe $100,000 on the mortgage, then you’d have $150,000 in home equity.
You cannot borrow all of the equity you’ve built in a home. But depending on your situation, you could tap into a relatively high loan amount. After you receive the lump sum loan amount, you’ll make regular monthly payments for a specified number of years.
If you default on the loan, the lender has the right to foreclose on the home. For homeowners able to commit to another mortgage payment and wanting to make a lot of improvements, then a home equity loan could be a good fit.
Home Equity Lines Of Credit (HELOC)
Like a home equity loan, a home equity line of credit (HELOC) is based on the equity you’ve built in your home. But unlike a home equity loan, a HELOC is a revolving line of credit that you can tap into on an as-needed basis.
When using a HELOC, the loan details will feel more like a credit card. That’s because you can draw funds when you need them throughout the draw period. However, you’ll still need to make regular monthly payments to pay off this balance. And remember, this monthly payment is on top of your existing mortgage payment.
If you aren’t exactly sure how much your home renovations will cost, this type of financing gives you the flexibility you need to cover the costs. But you’ll be using your home as collateral for this line of credit. With that, the lender may foreclose on your home if you fall behind on your payments.
A cash-out refinance allows you to take out a new mortgage loan with different loan terms. If you’ve built equity in your home, this loan type allows you to pull out a lump sum.
Of the financing options on this list, you are likely to tap into the lowest possible interest rate through a cash-out refinance. But make sure that you can obtain a lower interest rate than your current mortgage rate before jumping in.
You’ll need to know what the cost of your home improvement project is before finalizing your cash-out refinance. Otherwise, you might not take out enough to finish the project. You won’t be able to pull out funds as needed with this financing solution.
Also, you’ll have significant upfront costs with a cash-out refinance. Essentially, any closing costs you paid for your original mortgage will need to be paid again for your new loan. Typically, closing costs amount to thousands of dollars. Take the time to run the numbers before moving forward with a cash-out refinance.