Home remodeling projects are exciting. There’s so much to plan and so many different options for how to make your home uniquely your own. However, planning doesn’t get very far if you don’t have the funds to bring the project to fruition. There are many different ways to finance a home remodel if you are certain you need to proceed.
Credit Cards
There are home improvement stores that offer credit cards and lines of credit with their stores. You can apply and use the cards or lines of credit to buy items like doors, sinks, appliances, lumber countertops, cabinets, light fixtures, plumbing, tubs, toilets, and sink or shower hardware. While you can buy a lot of the supplies you need and want this way, you still need to hire a contractor to help with the work.
Personal Loans
You can talk to your bank and fill out an application for a personal loan. If your credit score is really good, and you have a decent job with steady income, your bank may approve you for the funds you need to complete your project. Even so, a personal loan often has limitations, and the interest rates might be higher than you want to repay.
Home Equity Loans
Home equity loans are loans you take out from a bank or lending institution against the equity you have in your home. The equity is the amount of home you own outright versus what you still owe. For example, if your home loan was originally $200,000 but you have paid off $50,000, you have $50,000 worth of equity. Additionally, if the value of your home or the improvements you have made on your home increase the value of your home above and beyond your original loan, that is also equity.
Home equity loans work best when you have successfully paid off a large portion of your mortgage and your home’s value has significantly increased. You can borrow up the max amount of equity against your home if your bank or lender is willing to lend it to you. Then you can use those funds to complete your remodel project.
HELOCs (Home Equity Line of Credit)
A HELOC is similar to a home equity loan with one major difference. The HELOC is a revolving line of credit that you can continue to pay down and reuse for as long as you choose to keep the HELOC open. The home equity loan is a loan with a fixed interest rate and a fixed ending point. If you pay down the equity loan, you cannot renew it until it is paid off.
A lot of homeowners prefer the HELOC because they can keep using it to pay contractors and pay for supplies for home remodels. The HELOC can also help pay down credit card debt, consolidate other debt, and then pay it off under the HELOC. Your home’s equity and your home itself secures the HELOC.
A Second Mortgage
A second mortgage is also similar to a HELOC or home equity loan because it is based on the amount of equity you have. The difference with a second mortgage is that your bank or lender will only allow you to borrow up to a maximum of 20% of the equity you have. If you don’t have a lot of equity to begin with, the 20% of that amount really isn’t much at all. Just to get an idea of what that would look like, say you have $30,000 in equity built up in your home. Twenty percent of that is only $6,000, and there’s no guarantee your bank or lender will give you that full amount.
A second mortgage has interest rates lower than credit card rates, but the bank or lender puts a lien on your home. If you default, the bank can seize your home and sell it. Other means of financing your home remodel are often more favorable because you can borrow more.
Refinance with Cash out Option
A refinance on your existing mortgage is a good option if you already have a really high interest rate on your home mortgage. In some cases you can refinance with a cash out option that puts extra cash in your hand. The extra cash you can use for your remodeling project. Just be aware that any progress you have made thus far with your mortgage payments becomes null and void with a refinance as you start fresh with a new mortgage paying on the amount you still owed from the original mortgage.
