There are different ways to finance a reno, whether you want to upgrade your kitchen or dining room or have another home improvement project in mind. You can use cash or apply for a secured or unsecured loan, home equity line of credit, or another financial solution depending on your project requirements, amount of cash, scope, etc. Large products require more cash and fortunately, banks have plenty on offer. Solutions to look into include reverse mortgages, home equity loans, and more.
If you need a small amount of money and have an emergency fund, then you can use cash for your project. If you are short of money, then you may want to go through your assets and belongings and sell items that you no longer need.
Use Low or Zero Interest Card for a Small Reno Project
If you want to reinvent a room or remodel the kitchen, one idea is to use a low or zero interest card with a large limit. The same goes for things like repainting the interior, replacing the plumbing, routine maintenance, and other basic, less expensive updates. If this is the case, a low interest card can be a good choice to benefit from the low promotional rate. Keep in mind that the promotional period is usually over in 6 – 12 months, and a standard rate applies afterwards. The main benefit is the low cost. However, there are no tax benefits and the payback period is much shorter than conventional credit.
Apply for a Personal or Unsecured Loan for a Medium-Sized Project
Examples of medium-sized projects include roof repairs, adding energy-efficient insulation, deck or bathroom addition, etc. You may want to apply for a personal or unsecured loan to finance your home improvement project if you need between $15,000 and $50,000. Credit unions, banks, peer to peer lenders, and other providers offer unsecured financing. The main advantage for borrowers is that this is a low-risk solution compared to secured loans, which require collateral. Unsecured loans usually go with higher rates because of the added risk for financial institutions. At the same time, you benefit from quicker approval compared to secured options. The reason is that with secured financing banks require a validation of the security or collateral, which takes time.
When it comes to interest rates, customers with spotless credit and steady, high income are offered better terms and rates of about 7 – 9 percent. Those with tarnished credit may actually see their application rejected.
The main benefits include a longer repayment period, lower rates compared to credit cards, and no processing fees and closing costs. On the downside, there are no tax benefits that you normally get with a home loan.
Apply for a Secured Loan for a Large Home Renovation Project
A secured loan is a good choice if you need $50,000 or more. If you have a major home renovation project in mind, then you may want to apply for a secured loan. This is especially true for properties that are not habitable, homes in need of conversion, and derelict properties. In this case, you will need money for things like design and survey fees, purchase costs (materials), and the renovation work itself. A large home renovation project can cost a lot of money. Many banks offer large loans but require collateral to ensure repayment. Depending on the amount requested, your credit score, and other factors, the collateral can be in the form of real estate, vehicle, home, vacation home, etc. While you risk losing the asset in case of default, you benefit from more affordable payments and a lower interest rate of 3 – 4 percent.
This is a type of mortgage refinancing and another way to pay for your renovation project. Borrowers refinance to obtain more money, and equity is extracted as a result of this. People usually resort to cash-out refinance to buy assets of value or pay down personal loans, cards, and other types of consumer debt. How does it work? Suppose you owe $60,000 on a property worth $320,000. If you need $40,000, then you are free to refinance for $100,000. You will get $40,000 in cash while $60,000 is the outstanding balance. To prove that you qualify, you will be asked to provide information about your debts, assets, income, and so on.
While this is one way to free up cash, there are downsides to consider such as higher than average interest rates.
Home Equity Line of Credit
This is a type of adjustable mortgage whereby the interest rate moves up and down with rate fluctuations. If the rate suddenly skyrockets, you will end up paying a lot of money. The main benefit is the fact that there are no closing costs, and you are free to draw on the line as many times as you need to. Still, there is risk involved if you opt for a HELOC.
A reverse mortgage is an alternative to consider if you are 62 years old or older. In this case, borrowers are free to draw cash to finance projects, make purchases, go on vacation, or anything else. There are no monthly payments to worry about, but owners are still required to pay homeowner’s insurance and property taxes.