Maybe you’re hoping to sell your home sometime soon and it needs sprucing up. Maybe you just can’t stand the look of your kitchen cabinets anymore.
Whatever the reason, you may want to remodel your home without depleting your bank account — or you may be short on cash. That’s where a home remodeling loan comes in. You may have more options than you realize for financing home renovations.
Low-Rate Credit Card
If you have a credit card with a low interest rate (or perhaps even a 0% balance transfer option), charging your remodeling purchases allows you to pay them off over time at an attractive interest rate. (Lower rates require good credit.) But you’ll need some discipline to avoid charging more than you can afford to pay back in a reasonable period of time.
Pros: Credit cards are widely accepted, though it is possible some contractors may accept only cash or checks. Using a credit card gives you the right to dispute certain charges if goods or services aren’t delivered as agreed.
Cons: Low minimum monthly payments can stretch the debt out for decades, resulting in high interest charges over time. If the balance on a card with a low introductory rate isn’t paid in full by the time that period expires, the interest rate will often jump dramatically. Interest is not typically tax-deductible.
Home Improvement Store Financing
Similarly, many home improvement stores offer special financing for major purchases. Interest-free financing for 12 to 24 months is not uncommon. Good credit will be required to qualify, especially for large credit lines.
Pros: 0% is a hard rate to beat. These offers also typically carry no annual fee and low monthly payments.
Cons: The interest rate after the introductory purchase can be high, and with some no-interest financing plans, the rate may apply to the entire balance if not paid in full by end of intro period. Interest is not usually tax-deductible.
A personal loan is another alternative. (If you’re unfamiliar with personal loans, here’s a quick explainer.) You may be able to borrow the amount you need and get a loan with a fixed repayment schedule and interest rate. These loans are typically considered “installment loans,” and as a result, a balance on one of these loans is less likely to hurt your credit scores, when compared to using a significant percentage of the balance available on a credit card or line of credit.
Pros: A personal loan’s fixed monthly payment can be helpful for budgeting, and prevents debt from being stretched out if only minimum payments are made.
Cons: The interest rate on a personal loan may be higher than promotional financing (though may be lower in the long run if repayment takes several years). Interest will not likely be tax-deductible.
Home Equity Loan
If you have sufficient equity in your home, a home equity loan or line of credit allows you to borrow against that equity. Loans are usually available for up to 80% of the home’s value (including the balance owed on the first mortgage). “To get anything decent (interest-rate wise) you need a 700 credit score,” says Scott Sheldon, senior loan officer with Sonoma County Mortgages and Credit.com contributor. And there’s always the danger of getting in over your head. A HELOC is “like a giant credit card tied to your house,” he warns. If you default on that “credit card” you could face foreclosure.
Pros: No closing cost options are available. Interest rates are often low, and interest may be tax deductible if loan funds are used to improve the home. Low monthly payments can make this an affordable option.
Cons: Interest rates are variable, which means they will likely rise before the loan is paid off. Your lender may offer interest-only payments for 10 years, after which payments can rise dramatically when the loan goes into repayment.
Another option, if you have equity in your home, is to refinance your current mortgage and take “cash out” to pay for home improvements. Conventional lenders often allow loans up to 80% of the home’s appraised value. But veterans and active servicemembers may be able to borrow up to 100% of their home’s appraised value using a VA cash-out refinance, says Chris Birk, director of education with Veterans United Home Loans and Credit.com contributor. And “you don’t need to currently have a VA loan,” he says.
Pros: Low fixed interest rates available, depending on credit scores. Because the new loan and old loan are rolled into one loan, your overall payment may not increase significantly (depending on the amount borrowed and for how long, as well as the interest rate).
Cons: You may “start over” with a new 30-year loan, and over time, additional interest costs may be significant. Tapping most or all of equity may leave you with no leeway if you need to sell your home.
If you are 62 or older, a reverse mortgage allows you to tap equity in your home for any number of purposes, including home improvements. These loans are often popular with older individuals who may not have significant income but have equity in their homes. They may allow the homeowner to make needed improvements and remain in their home even if they can’t qualify for a traditional loan. Free housing counseling is available and required before getting one of these loans.
Pros: It’s generally easy to qualify for a reverse mortgage, and there are no monthly payments. (Taxes, insurance other expenses must still be paid, however.)
Cons: These are complex financial products and can be confusing and expensive. Interest continues to accrue until the loan is paid off, so if the borrower dies or must sell their home, little to no equity may be left.
With all of these options (with the exception of of a reverse mortgage) the interest rate will be based in large part on the borrower’s credit scores. So check your credit reports to see where you stand before you start shopping. You can get your free annual credit reports at AnnualCreditReport.com and you can check your credit scores for free every month on Credit.com.
And having a plan — both for the project and to repay the debt — is important. Build in an extra 20% to your budget “just in case,” and if you don’t spend it, you’ll be able to pay off your debt that much faster.
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