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
— How they work: As many homeowners choose to improve their current digs over jumping back into the housing market, home improvement retailers are responding with a range of great deals that highlight innovative products and make improvements easy. A store credit card is a convenient means of financing smaller-ticket items like appliances and project materials, and usually involves a delayed payment schedule (typically from six to twelve months) and low or no interest on the balance for a predetermined period of time.
- — What you need to know: Approval and credit limit for a store card will of course depend on your 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
— How they work: Also appealing to big-box customers are store finance programs that cover project materials and retailer-contracted labor for bigger improvements like new flooring or kitchen updates. These unsecured loans usually require a minimum initial purchase of $1,000, and terms often specify no payments or interest on the loan for the first six months, after which the set payment schedule and interest accruals begin.
— 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
— How it works: 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: 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
— How it works: If you prefer a fixed interest rate and fixed monthly payments for home improvement financing, a home equity loan is the way to go. The loan amount you qualify for depends on the equity you have in your abode, and you’ll receive the funds in a lump sum to be repayed over several years, starting with loan fees and closing costs.
— 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 longtime impact, like replacing a roof.
Home Improvement or Personal Loan
— 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. Free online financial calculators 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.