When you decide you want to make changes to your home by remodeling or renovating, you must weigh what matters most to you: making changes immediately or using the most cost effective method. Some financial solutions get you money quickly, but you pay dearly for them, like construction loans. These include any type of loan except a home equity loan or home equity line of credit (HELOC). On the flipside, you could try saving up the money and paying for everything outright - but that requires waiting until you save the amount of money that you need.
Saving Up for Your Remodeling Project
Start a building fund for your project. This lets you save for the remodeling work a little bit at a time. Conduct some research into the typical costs of each item you want to change. Build a rough budget based on this. The budget provides you with an amount you need to save.
Look at your existing budget to find spots where you could re-direct money. Getting a second job offers another option. The latter means you don’t need to alter your way of life or give up anything while you save the money for the remodeling or renovating.
On the downside, if costs go up while your contractors work, you only have the money in your bank to turn to for the overruns. That may mean cutting corners or cutting your everyday budget to fully fund your project budget.
Pros:
- Zero payback time
- Immediate equity added to your home
- No interest paid
Cons:
- Takes longer
- Less flexible budgeting
Take Out a Home Remodeling Loan
Many people think first of taking out a home remodeling loan, also called a home improvement loan. You apply for a personal loan that specifies its use. You must use all of the funds specifically for remodeling your home or making home improvements. You pay it back over the course of a few years and you pay interest.
About that interest – if you maintain good or excellent credit, you qualify for low-interest rates, sometimes around two or three percent. This still means that you pay more than your project costs to have the money to do the project.
Pros:
- You may qualify for more than your project requires, providing you with leeway
- Easy to obtain so long as you maintain good credit
Cons:
- Charges you interest
- Long payback period
- May require collateral
Put It on a Credit Card
A small project can fit on your credit card, but unless your credit card charges zero interest, you will pay more than the actual project cost. Most credit cards charge about 20 to 25 percent interest, so you’d pay quite a bit more than your actual project cost.
Many people argue that they could pay it off before the due date, but if you already saved that amount of money, you may as well buy everything outright rather than use your credit card. If something happened that you could not immediately pay the credit card charge, you would have used nearly all your available credit in all likelihood.
Pros:
- Uses credit you already have
- No new credit check
Cons:
- Limits your project to your available credit
- You won’t have that credit available until you pay back the loan
- Charges you interest
Use the Cash Out Refinance Method
A cash-out refinance mortgage replaces your existing mortgage and provides a portion of your home’s equity as cash. Equity refers to the part of your home that you own. When you first purchase your home, the bank loans you the money. As you repay your mortgage, you earn equity. If your home value equals $100,000, and that’s the amount of your mortgage, once you pay the first $1,000, you own 1/100th of the home. Once you pay $50,000, you own 50 percent of the home or $50,000 in equity.
You may or may not land a better interest rate this way. You can’t obtain more than your home’s equity using this method. It only provides a good method if you already paid back quite a bit of your mortgage.
You still have your mortgage. You may pay more or less in interest. You’ll lose most of the equity you had built in your home. That means you set yourself behind schedule paying back your mortgage.
Pros:
- Uses your home’s equity
- No additional loan debt
Cons:
- Could increase your mortgage’s interest rate
- Puts you behind on repaying your mortgage
- Limits you to the amount of equity in your home
Take Out a Home Equity Loan
The last option available, the home equity loan or home equity line of credit (HELOC), accesses the equity you earned in your home as a line of credit that you don’t pay back or that you pay back over an extended time. The two options differ in that some HELOCs charge no interest, and some charge a minuscule amount. What interest rate you qualify for, your credit score determines.
Pros:
- Uses your home’s equity
- Immediate funding access
Cons:
- Reduces your home’s equity
- Might charge interest
Finding the Money for Home Remodeling
However you obtain the funding for remodeling your home, you'll improve its value and livability. You'll own the immediate increase in value, effective equity, immediately if you use savings to pay for everything or as soon as you pay back your loan otherwise.
