Five ways to pay for home improvements

(Last Updated On: May 9, 2017)

How to Afford your Home Improvements

Want to update that kitchen?  Remodel the Bathroom? Put in a Pool?  Add a room or bathroom? There are many ways to pay for updating your home today.  Here are the top 5 options for paying for home improvements.

Here are five options to consider if you’re thinking about making some home improvements:

Pay Cash option for paying for your home improvements

You could pay cash for the improvements if you have the money in a checking or savings account.  However, there are two drawbacks to consider before you go this route:

  • Savings Depletion: a large home improvement project could quickly deplete your savings. Think about this project in the context of the next 3-5 years. What other large expenses could crop up during that time period, and would it be useful to keep your savings on hand for those items?
  • Opportunity Cost: would it more useful to invest that money in a college savings plan or retirement account? For example, if a home improvement loan costs less than what you’re earning in your investment accounts, you may be better off investing your money instead of paying cash for the improvements. Talk to your financial advisor for more details.

Use Credit Cards to pay for your home improvements

High rates: Some credit cards have very low introductory interest rates that last for a certain period of time.  You could potentially tap into those offers if you’re confident that you can pay off the card(s) before the introductory period expires.  The drawback with this option is that life happens, and you may not be able to pay off the card quickly as you initially thought.  In that case, your interest rate could quickly skyrocket.

Use a Cash-out Mortgage Refinance Loan to Pay for your home improvements

Is using a cash-out mortgage a good idea for renovating your homeLegal Limits on Home Equity:  The main drawback is that in many states you are limited to how much equity you can take out so if you don’t have 30% or 40% equity you may find that a cash-out refinance will not work.  Cash-out loans are generally best suited for consolidating debt or other purposes rather than making renovations to your home. In some cases, you may be able to take out a larger mortgage and receive some extra cash at the closing too.  House prices have improved in many markets, so some homeowners have enough equity in their homes to do this.  Rates are still very attractive, so you may end up with a very similar rate to the one you have now.  Contact us if this is something you would like more information on.

Home Equity Loan or Line of Credit (HELOC) to Pay for your home improvements

Legal Limits on Home Equity: A home equity loan or line of credit is basically a “second mortgage” that you take on the house.  You would leave your current mortgage as is, and you would add a second mortgage with its own set of interest rates, payments, and terms. HELOCs also have the same drawback as home cash out loans.  Many states you are limited to how much equity you can take out using an HELOC so if you don’t have 30% or 40% equity you may find that a cash-out refinance will not work.

Home Renovation or Rehab Mortgage Loans  to Pay for your home improvements

Home renovation Loans have none of the limitations of HELOCs or cash-out loan and are treated as a normal refinance.  There are three types of Home Renovation loans for your personal home available nationwide.

  1. For minor renovation and repairs, you have the FHA 203k Streamline which allows up to $35,000 in repairs to your property and you can read more about that in our FHA 203k streamline article.
  2. For major renovation and repairs, there is the FHA 203k Full renovation loan which allows everything from adding rooms and replacing your roof.  You can read more about the Full FHA 203k renovation article.
  3. If you have not only major renovations and repairs but also want to add items such as a pool, spa or other “luxury items” then the HomeStyle Renovation loan may be just the loan in your situation and you can read more about that in our HomeStyle renovation article.

So, there you have it!  Five ways to pay for home improvementsContact us for further details or to explore your home improvement, remodel or rehab mortgage loan options.  We would be delighted to discuss the details with you about your project.

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