How to Pay for Home Improvements

how to pay for home improvement

If you love your home, but want to improve on it either on the interior or exterior, you may be wondering what your options are in terms of payment.

Whether you want a new master bathroom, an expanded porch, or a renovated kitchen, there are quite a few ways to pay the bill. The important thing is to make sure you understand your various choices, what kind of purchases they work best for, and how to decide what form of payment will not just improve your home, but will also not hurt your financial situation.

If you’re not quite sure what your options are, don’t worry! We’ve got you covered.

Major Credit Cards

If you’re looking to make a couple smaller purchases and you don’t already have a credit card from a major provider, it might be the right time to consider signing up for one. First off, many major credit cards offer great introductory offers, like 0% APR for a year, they also offer rewards like cash back, or points that can translate to travel miles, online purchases, and much more.

home improvement

The downside of credit cards is that it’s quite common for people to get into trouble in the form of credit card debt. If you can’t pay off your card’s balance each month, the interest you’ll end up owing could far outweigh the perks you are earning. Also, the interest rates vary from card to card, so if you don’t do your research you could end up paying more than you signed up for.

Store Credit Cards

If you’re not looking to sign up for a major card just yet, but still want to pay for your home improvement costs with credit, a good option could be signing up for a card from stores ike Lowe’s, Home Depot, or similar home improvement chains.

Many of these cards offer similar promotional introductory offers like no interest, but make sure to be aware of expiration of these offers because you could be on the hook for back interest if your card isn’t paid off by that time. These cards can only be used at the store, but if you get one you can also get huge memberships deals that will help you save loads of cash on your many home-improvement projects.

Personal Loan

If your expenses are going to be more expensive than anything you’d want to put on a credit card, a personal loan is a great way to go. These are unsecured loans and are typically dependent on your credit score, but they are fast and simple and will help you get started on your project ASAP.

One thing to keep in mind is that these loans have pretty high interest fees, so make sure you’ll be able to cover those costs well before you take out a loan of any size.

Home Equity Loan

A home equity loan is basically just taking out a second mortgage on your house. It offers a fixed interest rate, but it is typically higher than it would be for a first mortgage or refinance.

This is a good option to consider if you want a fixed rate but have a great interest rate on the first mortgage. With this kind of loan, you can continue to pay off your first mortgage at a low rate and just add one your second payment. These are typically simpler than a full refinance and less expensive than a line of credit.

This is also a good option to consider if you plan on staying in your house for the foreseeable future.

Home Equity Line of Credit

Otherwise known as a HELOC, this option is a bit like a credit card except for the fact that the line is credit is secured by and tied to your house. If you don’t pay on time, you could risk getting your home foreclose on.

The good thing about HELOCs is that they can have lower interest rates than credits cards and can offer tax benefits. The bad thing is obviously that you could lose your house. Make sure you can make all future payments before you take out a HELOC.

Refinancing

A full refinancing of your home finance can be an attractive option even though it will require you do some serious work and cover a few upfront costs. This could be a great option to help cover home-improvement costs if you have built up a large amount of equity in your home.

If you already have a high-interest rate, you could end up get the lower rate available and could reap some tax benefits.

Title I Loans

This is a government program that helps homeowners with little to no equity in their home make improvements affordable by insuring lenders against losses on those loans. There are several stipulations, however. First off, the improvement must be considered light or moderate to be approved, beyond that, the loan cannot exceed $25,000.

Upfront costs usually amount to just 1% of the loan you end up taking. You can contact The Department of Housing and Urban Development to get help finding a lender for a Title I loan.

401(k) or IRA Loan.

If you’ve got few other options to turn to, but have money in a 401(k) or traditional IRA, you could take money out of those funds to help pay for your home improvement costs.

This might seem like a great idea because you are technically borrowing money from yourself and paying the principal and interest back to yourself, but looks can be deceptive. First of all, if you don’t put money back in a timely manner, you could be hit with a 10% penalty. Secondly, if you leave the job that you have your 401(k) or IRA with, you’ll have to pay back the loan in a very short period of time.

On top of that, this kind of borrowing can have possible tax consequences. Also, it can very well impact your long-term retirement goals and plans.

Life Insurance Borrowing

If you have a cash-value life insurance policy, you actually have the option to borrow up to the policy’s cash value. On top of that, there Is a repayment schedule that can help you bring your policy back to its original balance.

Consider the fact that you’re not borrowing from yourself, you’re borrowing from the insurance company that holds your policy. Your loan balance could end up growing faster than the cash value of the policy if you don’t pay it back. On top of that, if the amount that you owe exceed the cash value of your policy, you’ll have to pay the difference and may face tax consequences.

This should be seen as a last resort, just like taking out a 401(k) or IRA loan.

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