What’s the Best Way to Finance Home Improvements?

What’s the Best Way to Finance Home Improvements?

Zenan Hasanovic, Branch Manager – Basking Ridge, NJ

With Spring upon us, now is a great time to think about boosting the value of your home through improvements, repairs or wholesale remodeling. Investing in home improvement ultimately adds value to your property, building a better nest egg for retirement or for a rainy day. But this can be expensive. According to a recent Realtor.com article, home remodeling can range from between $25,000 and $45,000 for painting, small repairs and landscaping all the way to an average of $76,000 and up for fixing foundational problems, roofs and sewer lines1. Though these projects will only benefit your net worth in the long term (and some are necessary just to keep your home livable), many people don’t have enough cash on hand to finance them out of pocket. Taking out some type of loan is usually necessary, and it can make sense to use your home equity to do this since financial institutions will see that you’re enhancing the value of the asset you’re leveraging. But what types of options exist – and what are their pros and cons? In short, what’s the best way to finance home improvements, given your own situation and plans?
Person holding business paper

Home Equity Loan
A Home Equity Loan involves using your home value to get a large sum of money “up front,” which you repay over time with a fixed monthly payment. This enables you to choose the best option and interest rate for you, knowing that rate won’t fluctuate. Another benefit of a Home Equity Loan is that it’s typically easier to qualify for one since the borrower is using his or her home as collateral. But this also creates some risk, since failure to repay can result in penalties. This type of loan is best used if you know exactly how much money you’ll need to finance repairs or remodeling and you’re confident you’ll be able to repay it over the specified term at the given interest rate. This type of loan is also beneficial if you currently have a low rate on your primary mortgage and you don’t want to prolong your mortgage payments (as you could possibly have to do if you go with the Cash-Out Refinancing option).

Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit, also known as a HELOC, is a revolving line of credit (similar to a credit card), and the rate is usually variable (however, some lenders allow conversion to a fixed rate). With HELOCs, borrowers only draw money as they need it and only pay interest on the amount they draw. HELOCs have two phases/periods:

  • draw period – the time period in which the borrower can access available credit/funds
  • repayment period – the time period in which the borrower must repay all money owed


It’s important to remember that once the HELOC is in the repayment period, the borrower can no longer access the funds. Some lenders offer an Interest Only HELOC which allows borrowers to only make the interest payments during the draw period however, the payments can increase significantly in the repayment period. Similar to the Home Equity Loan, defaulting on a HELOC can also result in penalties. On the positive side, having a currently low primary mortgage rate makes Home Equity Loans and Home Equity Lines of Credit attractive options. These types of loans are also beneficial if you currently have a low rate on your primary mortgage and you don’t want to prolong your mortgage payments (as you could possibly have to do if you go with the Cash-Out Refinancing option).

So, what’s the best way to finance home improvements?
The answer to this question is, “it depends.” I noted that whether your current mortgage rate is high or low and if you plan to stay short or long term at your current home play a role in deciding which option works best for you. As you contemplate home improvement financing options, don’t hesitate to reach out to Affinity for help. Spring is coming and it’s time to make your home better – but don’t rush into it without first getting the best financial advice!

                                                   

This information is for informational purposes only and is intended to provide general guidance and does not constitute legal, tax, or financial advice. Each person’s circumstances are different and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and/or legal counsel to discuss your specific needs before making any financial or other commitments regarding the matters related to your condition are made.  

1 Retrieved from https://www.realtor.com/advice/home-improvement/how-much-does-it-cost-to-renovate-a-house/