Financing a Home Remodeling Project
All homes need occasional repairs, but eventually they will need more extensive refurbishing. There are a lot of financing options available, and weighing all the pros and cons can get a bit overwhelming. Here is an overview of the most common options:
Using the equity in your home
There are three ways to do this:
- Cash-out Refinancing pays your existing mortgage plus the amount you want to pay for the project. The interest rate may be lower and it should be tax deductible.
- Home Equity Loans are secured by the equity. These loans are a lump-sum amount with a fixed rate and may be tax deductible. The rate may be higher than a First Mortgage.
- A Home Equity Line of Credit is a variation of a Home Equity Loan, but it has a revolving line of credit. Again, it is secured by the equity in the home. The borrower can make payments, and then draw funds when they are needed. These types of loans make it easy for major improvements when making multiple payments. Interest rates are usually variable, and there may be an annual fee.
Renovation Financing
This type of loan allows use of the home's future value from the remodel to fund the project. This is especially helpful when the current value of the home is not high enough for a cash-out refinance of Home Equity Loan.
Not sure which option is the best fit? Try evaluating your financial situation, in view of the remodeling project, and consider the following questions:
- How much will the project cost?
- Do the additional payments fit in the budget?
- Will the value of the home increase?
- How long will it take to repay?
- What could go wrong?
There are a few key things to keep in mind when refinancing:
- Do get the lowest interest rate possible
- Do try to make sure the interest in your loan is tax-deductible
- Don't compromise your overall financial health to fulfill immediate desires
- Don't rush into anything
- Do your homework!
Now that you've done the tough stuff, have fun picking out tile and lighting fixtures and don't forget to plan a celebration to show it off to your family and friends!