Whether you’re planning to hire a professional or to do it yourself home improvement projects can get expensive fast. Often, when we work with our home painting clients, they are doing a whole gamut of other renovations as well.
Taking the time to plan exactly how you’re going to finance your home improvement project—including making a plan for unexpected expenses—before you get started is essential for preventing a massive headache down the road.
Let’s take a look at the most common options for financing home improvement projects:
You might actually make the payments with your debit card or a series of checks but the point of this option is that you’re paying for everything up front with money you’ve already earned. This allows you to save hundreds or even thousands of dollars on interest payments but saving enough money for anything but the smallest projects can take years.
If you have a significant amount of money saved away for your home improvement project but you know it’ll be a few years before you have all the cash you can also choose to pay for part of the project up front and use one of the other financing options on this list to pay for the rest.
- 0% or low interest credit cards
There are literally dozens of cards that offer a 0% introductory APR for the first 12-24 months that you own the card. You may also be able to get a card with a permanent low interest rate if you have excellent credit. Some department stores also offer store cards with special 0% interest financing on large purchases for the home.
Of course, there are limitations to this, the most obvious being your actual credit limit. Many cards that offer an introductory 0% APR also end up with unusually high interest rates when the promotional period ends, so you don’t want to borrow more than you can pay off within the promotional period.
- Personal or unsecured loans
Personal/unsecured loans are loans based entirely on your income and creditworthiness. A personal loan will typically have a noticeably lower interest rate than any of your credit cards. Personal loans can also be used to finance larger projects, with the typical range being $15,000–$50,000. They’re also easy to apply for, making them the perfect fit for projects under $50,000.
Of course the interest rate on personal loans is significantly higher than the interest on most home equity loans, which use your home as collateral. Personal loan agreements also vary more significantly than home equity loan agreements so it is essential to really thoroughly read the contract and make sure you aren’t paying any surprise fees.
- Cash-out Refinance
A cash-out refinance allows you to replace your current mortgage with a new one and take out a set amount of cash for a home improvement project at the same time. Depending on when you bought your home this may be a great opportunity to take advantage of lower current mortgage rates while simultaneously funding big projects. You’ll also get lots of time to pay the loan off, typically 30 years.
Unfortunately, cash-out refinances can be quite costly. Many mortgage companies charge high closing fees for this type of refinancing and your APR will be higher than it would be if you hadn’t taken any cash out. This means that a cash-out refinance can cost you thousands of extra dollars.
- Home Equity Loans
Home equity loans are essentially second mortgages taken out on your home to finance home improvement projects. Since your home is used as collateral banks are usually quite happy to give you a significantly larger amount than they would for a personal loan. You’ll also get a significant amount of time to pay it off, usually 15 years.
The downside of home equity loans is that they typically come with quite high closing costs, similar to what you pay to close a primary mortgage. Some home equity loans also charge a pre-payment penalty fee ranging between $1,000 and $3,000 if you pay the loan off early.
- Home Equity Line of Credit (HELOC)
The most popular form of financing for home improvement projects, home equity lines of credit work very much like a credit card. You are given a maximum loan amount and a card and/or check book that allow you to access the HELOC account at your discretion. This is ideal for dealing with unexpected expenses, an all too frequent occurrence when you’re doing home improvement projects. Most HELOC agreements give you 5 to 10 years to draw from the line of credit and a full 15 years to pay the loan off.
HELOCs are adjustable rate mortgages, which means that your APR may fluctuate significantly over the lifetime of the loan, with rates sometimes ending up significantly higher than what you’d pay on a regular home equity line. That said, HELOCs also don’t come with any closing costs, so you’ll pay much less up front.
To actually figure out what type of financing is best for your home improvement project you’re going to have to do the math yourself, but there are a few general rules: if your project will cost less than $15,000 funding it yourself with cash or credit card is ideal, personal loans are best for projects that will cost $15,000–$50,000, and loans that use your house as collateral are ideal for projects that will cost $50,000+.
Before you rush out to get financing for your home improvement project you should also consider how much it will improve your home—and how much it will raise the value when you sell the home. If the home isn’t going to significantly improve the value of your house it isn’t worth financing unless you can pay for it with cash.