When it comes to financing home improvements, there are a lot of ways to pay for every project. From replacing an appliance to adding a room or two, you can cover project costs through loans, great retailer deals and financing options that make the most of currently low interest rates.
So, what’s the first step toward financing your home improvement dreams? Careful consideration of the potential return on your investment and its impact on your home’s resale value. Over-customized features, unusual color palettes and changes made to follow fleeting trends aren’t great ways to spend your money, no matter how you finance a project. Home Improvement Loans
“A lot of times, the home improvements that people make are ones they shouldn’t be doing to begin with…Generally overdoing it on a project, or renovating a kitchen every few years,” says Pete D’Arruda, a financial advisor and president of Capital Financial Advisory Group in Cary, NC, and author of the personal finance book, Fine Print Fiasco. “It’s almost like a way to spend themselves into happiness, and that usually doesn’t work.”
With a truly value-adding project plan in mind and a realistic budget assembled, here are home improvement finance options to consider, in ascending order of project complexity and cost.
Store Credit Cards
Available at your favorite home improvement retailer, a store credit card is a convenient way to finance smaller-ticket items such as appliances and incidental materials needs.
- How they work: Repayment timing is flexible, and retailers frequently offer card promotions with delayed payment schedules (anywhere from six to twelve months) and low or no interest on balances for a designated period of time.
- What you need to know: Just like any other credit card, the credit limit will be dependent on applicant credit history. To get the most out of any low-to-no-interest purchase promotion offered, make sure you’ll be able to pay off the balance within the deal’s deadline — otherwise, you’ll be socked with interest of as much as 20 to 30 percent, often applied to the original amount charged.
Store Finance Programs
Many larger home improvement retailers also offer finance programs meant to cover materials and labor provided by their stores for major projects such as whole-room remodels.
- How they work: Though the details vary from store to store, these finance plans allow you to pay for purchases over time via an unsecured loan orchestrated by the store itself. Generally, $1,000 is the minimum initial purchase amount, and there are usually terms that allow for no payments or interest on the loan for the first six months, after which a set payment schedule and interest accruals set in.
- What you need to know: Store finance programs can be a good choice for those who haven’t been in their homes long enough to build up the equity needed for a bank-issued loan. Just don’t be pressured into a big purchase with a “here today, gone tomorrow” sales pitch. The right deal for your project will still be waiting for you the next day if you take a night to sleep on the idea before signing.
Home Equity Line of Credit
Equity is the difference between your home’s fair market value and the mortgage balance you have yet to pay, and if you’ve got enough stocked up, you can parlay it into one of the equity-based home improvement finance products offered by consumer banking institutions.
- How it works: A home equity line of credit provides you with access to money in installments as needed, with the total amount of money available to you being based on your home equity total. Offered by most consumer banking institutions, a home equity line of credit (HELOC) is a possible home improvement loan that provides the homeowner with access to money in installments, on an as-needed basis.
- The total amount of money available is based on the homeowner’s home equity total (the difference between their home’s fair market value and the mortgage balance yet to be paid), and repayment is flexible, with a variable interest rate and interest paid being up to 100 percent tax deductible.
- What you need to know: Repayment is flexible (some people may choose to pay only the interest for a certain period of time), with interest rate variable and the amount of interest paid being up to 100 percent tax deductible.
- D’Arruda recommends establishing a HELOC when you’re gainfully employed, even if you expect it’ll be quite a while before you think you’ll need it for home improvement projects; otherwise, it can be difficult to get one if you find yourself between jobs.
- He also stresses limiting use of a HELOC to home improvement expenses (rather than, say, paying off credit card debt), as it’s basically a secured loan relying on your home for collateral. In addition, be prepared to pay back any HELOC draws in a timely manner so that maximum amount of available credit is available for future needs.
Home Equity Loan
Also based on the equity you have in your home, a home equity loan is a good way to secure your home improvement financing if you prefer a fixed interest rate and fixed monthly payments.
- How it works: You receive your funds in one big lump sum payout, and repay the loan over several years, preceded by loan fees and closing costs. Because of that long-term, big-ticket factor, a home equity loan is suited to home improvement purchases that will have a longtime impact, such as a new roof.
- What you need to know: Because of its long-term format and substantial funding levels, this home improvement finance option is best suited to big-ticket projects that deliver long time impact, like replacing a roof.
Home Improvement or Personal Loan
Banks offer these loans for home improvers who don’t yet have enough equity for the two preceding options.
- How they work: Home improvement and personal loans can be strong options for those with big projects to finance but not enough home equity to qualify for a HELOC or home equity loan. These loan products offer fixed interest rates and fixed monthly payments to be made over a number of years.
- What you need to know: As with home equity loans, reserve the use of home improvement and personal loans for large projects that are long-term necessities.
Before you jump into the home improvement financing fray, take time to weigh your options and be sure which is the best match for your project and overall financial picture. The trick is, of course, to make sure the the cost of the money doesn’t exceed the value of the project. These cost estimators can help you get started with projections, and if you work with a financial planner, consult with them as well.
“A good financial planner — a coach — gives you the good, the bad and the ugly, and makes sure you understand the good, the bad and the ugly and don’t have any surprises come up in the future,” says D’Arruda. “There’s nothing wrong with using any of these home improvement finance vehicles as long as people do it within reason, and within reason to me means you think about it and you talk to people you trust.”
The more you know about home improvement loans, the better the decision you’ll make about how to finance your home improvement projects.