A Quick Guide to Home Improvement Financing

By HomeAdvisor

Updated July 25, 2018

There’s no place like home. But how much better would it be with that addition, or with a new kitchen? Once you have created a vision for your home, you’re going to need some money to get the job done. How do you get from here to there? Well, that depends on your financing options.

Home Improvement Financing Options

  • Credit Cards. The go-to for your clothes shopping may be the best answer for home improvement financing as well. If the cost is under a thousand dollars, a credit card is cost-effective and hassle-free. There is no paperwork or up-front costs like appraisal and origination fees.

  • Home Equity Loans. Home equity loans and home equity lines of credit (HELOCs) allow you to tap into the equity you’ve already established in your house in order to finance your home improvements. This way, you can use the equity you’ve established without actually selling your home. As an added bonus, interest payments are usually tax-deductible: One of the keys to home improvement financing is trying to minimize the pain of this interest.

  • Home Equity Lines of Credit. A home equity loan is generally the best way to go if you’re doing a one-time project. If the project is ongoing, however, a HELOC is a more flexible way to go. In open-ended projects, there are sometimes unexpected costs down the line, and you’ll find you need more money than was initially estimated. If more costs come up, you can withdraw more, without the hassle and expense of having to reapply. At the same time, they retain the tax deductibility advantage of home equity loans, and the interest rate is usually much lower than that of credit cards.

  • 401(k). Some retirement plans allow you to borrow against your fund for home improvements. Because it’s your money, the rates are usually low, and there’s no credit check and not much lag time. However, if you leave your job while you’re still in repayment, you will have to pay back the loan amount in full, or get hit with about thirty percent in withdrawal penalties and taxes. The same is true if you don’t pay back the loan within five years, meaning that this home improvement financing option is best for small to medium-sized jobs.

  • Life Insurance Loans. You may also look into borrowing on the cash value you’ve built up in your life insurance policy. This home improvement financing option is easy since there’s no credit check, and all you have to pay back is the interest. However, you may be lessening your death benefits by doing so—meaning that if you die before you pay it back, your family will receive less of a payout.

  • Margin Loans. Borrowing against your stock portfolio is another easy home improvement financing option. However, there is some risk involved: If the market does well, you may not have to pay back the loan, but if it does poorly, you may be forced to sell the stock.

  • Title 1 Loans. If you have limited equity in your house, you may qualify for a federal loan, insured by the Federal Housing Administration. These loans can only be used for essential improvements or to make a home wheelchair accessible.

  • Contractor Loans. This is one way to streamline the financing process, but it is one fraught with peril. For one, there may be hidden fees or finance charges in a contractor loan. For another, it means that the contractor gets paid up front, and if the work is not up to par, you have no recourse.

Final Thoughts for Home Improvement Financing

Yes, one of the keys is to reduce the pain of the interest associated with financing, but you also need to guard against hamstringing your monthly expenses and budget. If you can’t make the payments, no type of financing is going to work for you. Building up equity in your home is still a solid pillar for your total finances, but you can’t finance $100,000 kitchen makeover and expect additional property value to rescue you from the wrath of lending institution. In trying to make your home the best it can be, it’s important not to lose it entirely in foreclosure.

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