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8 Smart Ways to Pay for Your Home Reno

Aug 16 2021

Let us guess: Your dream home has Pinterest-worthy landscaping, a modern kitchen, 2.5 spacious bathrooms, gleaming wood floors, and enough room to give everyone in the family a little privacy when they want it. And, unfortunately, that’s not the one you actually own.

Welcome to the club! Homeowners are busy bees with renovating and improving these days. With home prices so high, many bought places that need work. And with too few homes to choose from, we’re remodeling instead of moving when we want more or better space.

Whatever the case for you, there’s the question of how to finance that transformation of your kitchen, bathroom, or yard. So here are eight solid ways to get the job done:

1. Cash

Consider this if you:

  • Have a separate emergency fund saved
  • Can save what you need before repairs become critical

If you had a pile of extra money, you probably wouldn’t be reading this post! But still, we have to say it: The best way to pay for a renovation is with cash, to keep your overall debt to a minimum. Put yourself on an automated savings schedule and take the opportunity to cultivate that virtue called patience.

Of course, patience can wear thin when core rooms like the kitchen and the bathroom are way past their prime. And waiting until you have cash isn’t always realistic — or even smart. Case in point: Don’t delay critical repairs for too long. A leaky roof would fall into this category. Neglect a problem like that, and it might turn into a bigger, more expensive one.

If you’re not sure how urgent a repair is, especially for something like the roof or anything structural, consult a professional — such as a licensed contractor or a home inspector.

Finally, don’t deplete your savings to renovate. It’s important to maintain a healthy emergency fund.

2. Grants and special programs

Consider this if you:

  • Don’t want to miss out on free or cheap money

Nonprofits and government agencies at all levels offer grants or low-cost loans for home repairs, rehab, and energy upgrades. Research what’s available in your area before taking out a traditional bank loan. A local homeownership advisor can be a big help.

Whether you qualify could depend on your income and the type of house you have. But don’t assume you’re not eligible based on income. Income restrictions that do exist can vary widely.

Here are just four common types of programs:

  • HIP loans. Many counties offer a “HIP,” or home improvement program. These subsidized loans can save you a lot of money, especially on interest, compared to commercial loans. There’s usually an income cap, plus a variety of rules.
  • Historic preservation. If your home is in a historic district, you might be able to get in on a program that helps fund renovations. One place to start your research is PreservationDirectory.com.
  • Disability assistance. Are you disabled? Many programs help with home modifications needed for medical or disability reasons (such projects are also tax-deductible). Some are devoted to disabled veterans. Try contacting your local social services.
  • Energy efficiency. There are all kinds of incentives and low-cost loans for insulation, new windows, efficient heating and cooling systems, and more. Visit the DSIRE database to find programs that might apply to you.

3. Zero-percent credit card

Consider this if you:

  • Need only a moderate amount of money
  • Have the financial discipline to treat the card like a regular loan

Credit card debt shouldn’t be taken lightly. But if you’re financially disciplined and your project is on the small side, a 0% card deal is a fast, easy way to get an interest-free loan. As long as you do in fact pay it off promptly. Know thyself!

Before you commit, get out your magnifying glass and scrutinize the fine print for hidden fees. Then be sure to treat the sum you put on the card like a regular loan. Don’t put anything else on the card, put yourself on a payment schedule, and pay off the balance before the 0% period ends. If you don’t pay it off by the deadline, you might be charged all the interest retroactively.

Heads up: The credit inquiry required by the application can lower your FICO score for a while, and so can carrying a big credit card balance, even if it’s not overdue. If you won’t be looking for new credit in the near future, the short-term hit to your credit score probably won’t matter to you.

4. Home equity loan

Consider this if you:

  • Have at least 20% equity in your home
  • Need a large lump sum

Do you have equity in your home and need a large lump sum for your project? A home equity loan, also called a second mortgage, might be the way to go. Interest rates tend to be higher than for a first mortgage, but still good, and the interest may be tax-deductible.

As with a first mortgage, you have to qualify, meet the lender’s requirements, and pay various fees. The typical term is 15 years or less. The loan can be refinanced later if necessary, but you have to pay off the balance if you sell your house. Watch out for maintenance fees and penalties for early payoff.

Heads up: Keep in mind that any time you tap your home equity, you’re not only reversing the equity-building process but also putting up your home as collateral. You risk foreclosure if you fall behind on your monthly payments. That’s why many financial advisors say that the only good reason to use your equity is to make home repairs or improvements that add market value.

5. Home equity line of credit (HELOC)

Consider this if you:

  • Have at least 20% equity in your home
  • Don’t need more than $25,000
  • Want to make a series of smaller improvements

Compared to a home equity loan, a home equity line of credit (HELOC) works more like a credit card. You don’t have to take out (and pay interest on) a big sum all at once. Instead, you borrow and pay as you go. This can make a HELOC a good choice for a modest renovation or a series of small improvements.

All that flexibility might make a HELOC sound less formal than a home equity loan, but it’s not. You still have to qualify, meet the lender’s requirements, etc. Plus, a HELOC is more complicated overall. Among other things, the interest rate is usually variable, and there might be ongoing fees.

Heads-up: See number 4. As with a home equity loan, you risk foreclosure if you fall behind on your payments.


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