The idea of customizing your home to suit your lifestyle and preferences can be very exciting whether you are starting your journey as a homeowner or you have lived in your home for years. However, the renovation project can be very daunting since the components needed for necessary repairs and customization require some good amount of money. If you do not have enough money in your savings to carry out a renovation project, then you can always seek out other finance options for your home improvement.
Factors to Consider Before Seeking Extra Financing
The first thing you need to do before you look for additional financing is to determine the exact amount of money you need for the project. To ensure you get the correct estimates, plan the project in full after sitting down with your contractor.
Once you have calculated the amount, add an extra cost for project upgrades and contingencies. This helps to minimize the chances of delays or lagging because of shortages in financing. Afterward, you can narrow down to the most ideal finance options for your home improvement based on your calculated final costs.
Ways to Finance Your Home Renovation Project
1. Use Cash and Liquid Assets
Instead of accumulating more debt, you can always use money that is readily available such as checking, savings, and bonds near maturity. Cash is one of the best ways to finance your home renovation project since you are not dependent on anyone and the speed of funding is instantaneous. The only downside is that it depletes any available reserves at your disposal and most people lack enough cash for bigger projects.
2. Low-Interest Credit Cards – For Small Projects
People with a decent credit score can always run into offers that hold zero percent interest on credit cards. Although you can easily apply and qualify for an easy-to-pay-off loan, it is very important to understand the terms and conditions for these credit card offers. It also comes with some pitfalls such as high-interest rates after the expiration of the offers, and a limited payback period.
3. Personal Loans – For Medium-Sized Projects
These loans are also referred as unsecured or signature loans because the lender has no collateral to repossess if you default on payment. The speed and simplicity of application and approval are what make them ideal for medium-sized projects. Furthermore, there can be little to no setup costs. However, personal loans are limited to certain amounts depending on the lender. Although you put up no collateral when applying for the loan, you are still on the hook for the balance and it comes with higher interest rates.
4. Secured Loans – For Bigger Projects
Unlike personal loans, secured loans require you put up collateral at the time of application. These type of loans are ideal for bigger home renovation projects because of the large amount of money you can borrow. However, each type of secured loan has its own benefits and downsides. Some of the secured loans you can use for your project include:
Home Equity Loans (HEL)
This loan comes with a fixed rate of interest in its entire life period. Although many home equity loans may have different terms, you can pay back the interest and principle with monthly payment plans that extend up to 15 years. The only disadvantage is that these loans are a bit pricey when you consider the closing costs and transaction fees incurred.
Home Equity Loan or Line of Credit (HELOC)
A HELOC allows you to pay for a home renovation without the need for refinancing by tapping into your equity. It comes with a lower interest rate and works similarly to a credit card.
Cash-out refinance helps you fund big projects by taking advantage of lower mortgage rates. You will be taking out cash for your home improvement while renewing your current mortgage at the same time.
As you can see, all these types of financing have their own benefits and downsides. This means that choosing the best finance option for your home improvement project will depend on your estimated budget and current situation. Careful planning before borrowing or seeking extra financing prevents unnecessary spending during renovation and heavy burden when paying back loans. Get serious about saving and earning more cash to minimize the cost of borrowing on loans. Whatever choice you make, it may be worth exploring several options as it helps determine the best way to finance your home renovation project.