Smart ways to pay for home improvements

05/12/2021

This is the season that many home owners are beginning to think about making improvements to their home from new decks to major kitchen upgrades. No matter the project, how you pay for the project is an important consideration and should be done before starting the project.
 
What are some of the determining factors in deciding how to pay for home improvements?
The overall cost, how quickly you need the funds, your ability to borrow and the equity in your home are the major factors in determining the best option for paying for any home improvement. The reason it is important to make a smart decision is so that you can make sure that interest charges don’t inflate the actual cost of your home improvement.
 
If it is small home improvement under $5,000, what are the best choices?
Paying with savings as long as it is not your emergency savings fund would be the best option because you avoid additional costs of interest on your home improvement.  Another option for small home improvements would be to use a credit card as long as you are disciplined to aggressively pay off the balance. A nice bonus would be if the card was a cash rewards card.
 
What if it is over $5,000 and you can’t save for it?
For those projects that are under $20,000, a personal loan might be the best option if you can get a reasonable rate because you can avoid application fees and usually have the funds within in a day.  Most institutions offer terms that can be up to 7 years and that will make for a budget friendly payment so that it doesn’t hinder your cash flow.
 
How about for larger projects that are $20,000 or more, what is the best method?
This is when you should use a home equity loan because of the better rate and longer term to repay that home equity loans offer. Additionally, you can get a line of credit and only advance the funds as you need them. If you do get a line of credit that is interest only payments, as some point you will want to pay more or convert to a fixed term home equity loan so that you can begin reducing the balance.
 
Does a cash-out refinance of your mortgage make sense for home improvements?
Right now this is a great time to consider this option, rates are low and if you have a major improvement, you can secure a low rate and have one payment. Since these projects often add value to your home, using a cash-out refinance is one of the better financial moves because you will quickly recoup the closing and application costs. If your mortgage rate is higher than the refinance rate, you actually have another reason to use this option.

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