FINANCING OPTIONS

Whether you want a refresh for a new season or you are getting ready to put your house on the market, a home project can be a big undertaking. One of the biggest questions you may ask as you plan any home renovation is how to pay for it.

Equitable Builds wants to find what’s best for you in order for you to get your job completed. That’s why we have taken the time to compile a list of options to help you take action on your upcoming home build or renovation project.

1. Save

The safest financial option to pay for your home renovation is to save a chunk of money for your project. If you don’t already have a large sum of money saved, this option can mean waiting longer to start your project. But, it also means you won’t have to worry about paying back a loan or large credit card bill once you finish your home renovation.

The amount you need to save depends on what type of renovation you’re doing and the scope of the project. If you’re looking to finance the whole project by saving, it might be smart to start small and take on less expensive projects first. This will ensure that you don’t get in over your head and wind up spending more than you intended.

2. Home Repair Loan

Home improvement loans are unsecured personal loans offered by banks, credit unions and a number of online lenders. Because the loans are unsecured, you don’t need to use your house as collateral to qualify. Your interest rate and qualification are based largely on your credit score. Funding comes quickly; once you agree to the terms, many lenders deposit money straight into your account in as little as a day.

Home repair loans and remodel loans typically have shorter repayment timelines, lower loan amounts and fewer fees than home equity loans or HELOCs. Most home improvement loans only go up to 12 years maximum. Home improvement loans also have much lower loan amounts, typically up to $100,000 at most, while home equity loans range up to $750,000. Home improvement loans are typically best for small or midsize projects in your home, such as a bathroom makeover or window replacement.

As unsecured loans, home renovation loans typically have higher rates, especially if you have fair or poor credit. Some lenders also charge fees for application processing, late payments and even prepayments on a remodel loan. However, you are not at risk of losing your home if you can’t pay.

Before applying for a personal loan for home improvement, compare the best home improvement loan lenders for low interest rates, competitive fees, friendly repayment terms and quick payouts.

3. Home Equity Line of Credit (HELOC)

Because a HELOC is a secured loan — backed by your home — you can qualify for lower interest rates than you would for an unsecured personal loan. A HELOC is also revolving credit, which means you can take what you need when you need it (up to your borrowing limit). Because of this flexibility, HELOCs are well-suited for longer, bigger projects.

Because you’ll have to put your home up as collateral, it could be foreclosed if you don’t make payments on time. Most HELOCs also have variable interest rates, which means your payments can increase depending on market conditions.

To borrow against your house, you must have sufficient home equity. Make sure you have at least 15 percent to 20 percent equity in your home. The amount you’ll be eligible to borrow depends on your loan-to-value ratio, or LTV. This score consists of your home’s value, the outstanding value on your mortgage and your credit score. Before borrowing, calculate how much your monthly payments will be.

4. Home Equity Loan

Instead of a HELOC, you could apply for a home equity loan, which is sometimes referred to as a second mortgage. This is a loan paid out in a lump sum that you can repay over a number of years in regular fixed monthly payments.

Home equity loans have much higher borrowing limits and repayment periods than home improvement loans. Home equity loans are also secured, meaning you put your home up as collateral.

Unlike HELOCs, you don’t have to worry about market fluctuations with a home equity loan. Once you lock in your fixed interest rate, you pay the same monthly payment over the life of your loan.

Home equity loans are best suited for medium to large projects. You will need to know exactly how much you need before borrowing, but you can borrow more and have more time to pay back the debt.

5. Cash-out Refinance

A cash-out refinance replaces your current mortgage with a new, larger loan and gives you a new interest rate. Because you get to pocket the difference between your old mortgage and the new loan, you could use the extra dollars from a cash-out refinance to make home improvements.

A cash-out refinance is a good option for homeowners who would not be able to afford an additional monthly loan payment without refinancing and who qualify for a better interest rate than they have with their existing mortgage. Because this financing method depends on the state of your current mortgage and comes with added costs, a cash-out refinance is best suited for smaller projects and emergency repairs.

If you’re thinking about refinancing, consider the drawbacks carefully. You’ll need to pay for an appraisal, origination fees, taxes and other closing-related costs. Unless you refinance your mortgage for a shorter term, you’ll be extending the life of your loan, meaning it will take you longer to pay it off. In general, refinancing is only a good idea if you can secure a lower interest rate than what you pay now.