Home improvement projects, such as replacing old siding or windows, add to your home’s overall value. However, paying for the work to be completed can sometimes be a challenge . Fortunately, there are multiple ways you can pay for home improvement projects that do not require emptying out your savings account. Here are four ways you can pay for your home improvement project, allowing you to reap the benefits of your home’s enhanced appearance and increased value.
1. Take out a home improvement loan.
After considering what type of projects you want to have completed and got an estimate for the work (making sure to leave room for error), you can apply for a home improvement loan. Home improvement loans are a good option if you don’t have equity in your home. They are unsecured loans based on your credit history and employment. They are generally available in amounts up to $50,000. The application process is usually quick, and funds can be available in a couple of days.
The drawback is interest rates can vary greatly and sometimes higher than other loan options. These loans also have no tax advantages.
2. Opt for a home equity loan.
When you take out a home equity loan for your home improvement project, you are essentially taking out a second mortgage on your home for a fixed amount. The amount you can borrow is based on how much equity is in your home. Most lenders will allow you to borrow as much as 85% of your home’s value when the loan is combined with your first mortgage. However, you must first subtract how much you owe on your home.
For example, if your home is valued at $250,000, 85% of the value would be $212,500. Let’s say you have a loan balance of $190,000. In this case, you would have $22,500 in available equity you could choose to borrow from.
This is a type of secured loan, meaning you’ll probably be eligible for larger loan amounts and lower interest rates. Plus, the interest rate is fixed, and you’ll receive the loan value in a lump sum, which you’ll immediately begin to pay back.
3. Take out a home equity line of credit (HELOC).
Both are secured loans, meaning there are two big differences between a home equity loan and HELOC. The first difference involves the interest rate. With a HELOC, the interest rate is tied to a benchmark index. As a result, your interest rate will change along with the benchmark index. (Some lenders will allow you to convert to a fixed interest rate at a later date.)
The second difference involves how you receive the money. Unlike a home equity loan, a HELOC is similar to a credit card. You receive a revolving line of credit. As you use up funds, the line of credit decreases. You do not start paying back until you begin to use the line of credit. Plus, you’ll see your line of credit increase as you make payments. There are two phases to a HELOC. The “draw” phase during which you can borrow from your line of credit and have the option of only paying interest and the “repayment” phase, which may include a balloon payment for the outstanding amount.
4. Project Financing
Many home improvement companies offer to finance for the products they sell and install. These loans can be done in-house or through an outside loan company. Since this type of financing is only available through the contractor to make sure you are confident in their products and abilities before starting the process. One advantage to this loan is the home improvement company often handles the paperwork and makes the process as easy as possible. A possible drawback is the interest rates are usually higher, and there can be service fees.