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5 common ways to pay for home renovations

28 April 2018

Making improvements to your home can improve its look and feel, increase its value, and enhance functionality. Even if you have some great ideas for home renovations, the most significant challenges arise when it comes to actually paying for your project.

Fortunately, there are several ways you can invest in your property through custom home renovations. Here are some of the most common ways to pay for home renovations.

1. Save money

If you want to fund custom home renovations without assuming any debt, you will need use the cash and liquid assets that are already available to you. Unless you have a surplus of extra cash laying around, using liquid assets will require you to budget and save.

You may have to cut back on discretionary purchases and find places to save money here and there for a few months. But when you do that, you will be able to pay for your home renovations in full without borrowing from a lender.

The obvious downside to using cash is the fact that you may have to delay your project for several months. However, there are major benefits to paying for your project this way. Paying with liquid assets means that you won’t be stuck with ongoing payments, high interest rates, lending fees or surprise charges. You can also skip the often lengthy approval process that you would have to go through to secure a loan via a lender.

2. Use home equity (HELOC)

A home equity line of credit (HELOC) is a loan that’s structured like a standard line of credit.

Generally speaking you can gain access to 80% of the equity in your home. The equity is estimated by deducting your current mortgage liability, from the market value of the property. For instance, if your home has a market value of $400,000, and you owe $300,000, your equity stake is $100,000. Since you can borrow up to 80% of the value of your home, you can then borrow up to $320,000. Given you owe $300,000 still, you could borrow the remaining $20,000 in equity.

Most people take out a HELOC as a second mortgage, as it can free up a significant amount of the equity of your home. HELOCs are a great solution to your question about how to pay for home renovations, but be sure to speak with a qualified mortgage specialist to discuss your specific circumstances.

3. Refinance your primary mortgage

Another way in which you can tap into your equity for home renovations is by refinancing your primary mortgage. With a cash-out refinance, you will negotiate the terms of your mortgage and secure a loan in the same way you did with your primary mortgage. However, you will receive any equity you have in your home at the closing of the new loan.

The benefit of refinancing over a secondary loan like a HELOC is that the interest rate is fixed and you will be able to make small, consistent payments for the duration of the loan term—which can be up to 30 years.

Refinancing to fund custom home renovations may be an appropriate option for you if you have considerable equity in your home and your credit score is favorable. With a bad credit score, you may be stuck with an excessive interest rate. And, if you don’t have much equity in your home, it might not be worth tapping into it in the first place.

4. Secure a second mortgage

As an alternative to refinancing, many people choose to pay for home renovations by taking out a second mortgage. With this option you are borrowing against the equity of your home and using your house as collateral. Securing a second mortgage will provide you with a lump sum of money that you can choose to spend however you wish.

You will be subject to closing costs in many cases, and the interest rate can be fixed or variable.

Instant cash sounds great—so what’s the catch? The truth is that even the most fiscally responsible individuals may lend themselves to ill-advised financial decisions or obtain poor financial and mortgage guidance. Be sure to consult with a professional mortgage advisor before speaking with specific second mortgage lenders.

5. Sweat Equity (DIY)

One of the most significant expenditures of any home renovation project is the cost of labor. In fact, many homeowners spend more on labor for a project than they do on materials. With that in mind, many choose to offset the costs of their home renovations with “sweat equity.”

Instead of hiring a contractor to bring in a paid crew of laborers, homeowners are increasingly tackling the job on their own, or with the help of friends and family members.

If you are an able-bodied individual with several willing volunteers, sweat equity could be a viable option for your home renovations. The clearest benefit to you as a homeowner is that your friends will likely help you out for free (or for some free pizza and beer!). You can save thousands of dollars by working on your home yourself and by enlisting your friends. What’s more, you can get your hands dirty and play an integral role in the improvement of your home.

Unfortunately, you will miss out on the technical expertise and quality that professional contractors can provide. You have to consider whether a potentially sub-par result is worth the money you will save on labor costs when it comes to your custom home renovations.

It’s impossible to say definitely which option is best when it comes to financing home renovations. You will need to take stock of your assets, your home equity, and your potential payments to determine which type of financing makes sense under your specific circumstances. It’s helpful to consult a financial planner or a friend who has good money sense to help you sift through your options and determine which one is best for your custom home renovations.

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