Most dream homes are created; they are not bought. Chances are, when you look around your home, you can find plenty of room for improvement. This is where home remodeling comes in. By implementing the right home remodeling ideas, you can create a custom home that reflects your style and preferences. That said, home remodeling costs money, and you may not have enough savings lying around to cover the various expenses involved. So, the question is, how do you finance a home remodel? The good news is there are many options to help obtain the cash you need to pay for your home remodeling projects. Let’s explore your options.
Home Improvement Loan
For most people, the best answer to how do you finance a home remodel is to start with your bank. Banks usually have a wide range of financial products you can apply for to finance your bathroom remodeling project or any other type of home improvement project. For starters, you can apply for a home improvement loan. This is a type of unsecured loan, meaning it doesn’t require you to provide security for the loan. An unsecured loan is less risky because you don’t have to worry about the bank seizing your home or assets if you default on the loan. That said, keep in mind the lender is more likely to charge a higher interest rate to offset the risk they are facing.
The biggest advantage of a home improvement loan is that it can be flexible in how you use it. That is, once you get the money, you can use it to cover various expenses related to your home improvement projects, whether you need to pay your home builders and roofing contractors or purchase new energy-efficient appliances. A home improvement loan might be the best option for you if you have a good credit score, as you’re more likely to secure a better interest rate. With a lower interest rate, you can easily spread your remodeling costs over time without paying too much over the odds.
Home Equity Line of Credit
A home equity line of credit or a HELOC is another lending product you can access at your bank or local financial institution. Unlike a home improvement loan, a HELOC is secured, and it typically comes with a variable interest rate, meaning your rate may change over time. In most instances, this type of loan is backed by your home, which helps to reduce the risk for the lender. In addition, when you get approved for a HELOC, you don’t receive a lump sum. Instead, you have access to a pool of funds up to a limit. You can tap into this pool of funds depending on your needs, and the good news is you only pay interest on the money you borrow. A HELOC is a type of revolving credit that’s linked to your bank account.
You can keep tapping into the pool of available funds as long as you make your repayments. For those that are looking for flexible solutions, the question of how do you finance a home remodel can be answered by considering a HELOC. This type of loan is especially suited for covering unexpected expenses that come up as your remodeling projects proceed. For instance, your remodeling company might discover faulty wiring in your home and suggest that you invest extra funds in electrical remodeling. If you have sufficient equity in your home, a HELOC allows you to be flexible with your spending, and you can enjoy longer repayment periods that are easy on your budget.
Home Equity Loan
Although they sound similar, a home equity loan is not the same product as a home equity line of credit. These two products can be the perfect solution to how do you finance a home remodel, but they work differently. They are also similar since they are available to homeowners that have built sufficient equity in their homes. That means a home equity loan is also backed by your home and is sometimes referred to as a second mortgage. When you get approved for a home equity loan, you receive the money as a lump sum, but you can repay the debt over time. This type of loan tends to have a longer repayment period which helps to make your repayments more affordable.
Unlike home improvement loans, home equity loans usually have higher borrowing limits and lower interest rates. This is because they carry less risk for the lender due to the fact that you’re using the equity you own in your home as security for the loan. The advantage of this loan is that you can receive a larger lump sum that enables you to pay for larger remodeling projects, such as home additions and whole-house renovations. In addition, a home equity loan can also pay for the smaller stuff, such as bathroom countertops and air conditioning installations.
Credit cards are another financial product that many people rely on to cover various expenses. You can use a credit card to cover various expenses. When asking how do you finance a home remodel, using a credit card might be the best solution if you’re looking to cover relatively small expenses. That’s because compared to other options we have compared so far, like the HELOC or the home equity loan, credit cards have lower borrowing limits. In addition, credit cards are notorious for having high-interest rates, which can increase the total cost of your remodeling project. To avoid this, it’s better to look for a credit card with a 0% introductory interest rate.
That means you’ll be able to use your credit card to cover much-needed expenses without being charged interest. Therefore, it only makes sense to use a credit card to finance a home remodeling project if you can save on interest. However, keep in mind that the promotional period doesn’t last forever, so you’ll need to have settled your credit card debt before the higher interest rate kicks in. To make the most of your credit card, be sure to also look for options that offer perks and rewards, such as cash back.
Cash Out Refinance
Truth be told, there are many solutions for homeowners that need to know how do you finance a home remodel. Still, another option that can help you unlock the extra cash you need for that bathroom installation or new paint job is a cash-out refinance. With a cash out refinance, you’re simply replacing your existing mortgage with a new mortgage. In other words, all you have to do is apply for a new bank, either with your current bank or a new bank. This new loan will be of a higher value than the existing mortgages. Once the new loan is approved, you use it to pay off the existing mortgages. But since the new loan is bigger, this leaves you with more cash in hand that you can use to pay for your home remodel.
Before opting for a cash out refinance, it may be best to sit down with your accountant to determine if this option makes financial sense. For instance, refinance only makes sense financially if you manage to secure a lower interest rate. Your accountant or financial advisor will help you make a wise decision by assessing the state of your existing mortgage, the added costs of refinancing, and your credit score.
Explore Government Loans
If you think you have exhausted your list of options for how do you finance a home remodel, you might want to think again. You can always explore government loans to see if you qualify. The greatest advantage of choosing a government loan for remodeling your home is that this can save you money since the loans tend to come with a lower interest rate. In addition, you may also have access to better terms than with regular loans you get at the bank. You’re encouraged to do as much research as possible to find out which government loans you qualify for and how to access them. Usually, it’s possible to apply through an approved lender, though the availability of such loans might vary from state to state.
An example of a government loan is one that’s targeted at new home buyers who are looking to upgrade their home but haven’t built up equity. In that case, you might find that applying for a government loan gets you better results than applying with a bank that has stricter requirements. However, keep in mind that this type of loan might not be flexible in how you use it since you can only use the approved funds for home repairs. For the most part, government loans are a great option since you’re guaranteed to work with a legitimate lender as long as you meet the eligibility requirements.
Borrow From Family and Friends
Before you think of borrowing from your bank or a traditional financial institution, have you considered the option of borrowing from family and friends? You might be surprised at how well this can work out. There are several factors that make borrowing from family and friends ideal. To begin with, you’ll have less pressure when it comes to repaying the loan since it’s easier to work out a flexible agreement with the people close to you. If you’re lucky, the person you borrow from will ask you to make repayments whenever your budget allows. Another advantage of this option is that you can end up with a low or zero interest rate on the borrowed amount.
Most banks are looking to make a profit with their lending products, but a family member might even waive the interest rate. At the end of the day, it all depends on the agreement you have. If a family member decides to be the solution to your dilemma of how do you finance a home remodel, there are ways to minimize the risk of future disagreements. For instance, you can involve an attorney to help you draft a binding contract that both parties must adhere to.
Wait and Save
So far, we have looked at various solutions to help answer the question of how do you finance a home remodel. In most cases, borrowing provides the easiest solution since a wide range of financial products are available to homeowners with the right qualifications. That said, borrowing isn’t always the best option for everyone. If you believe cash is king, you might prefer to bide your time and build up your savings before you invest in that bathtub installation. This comes with several benefits, chief among them the fact that you don’t have to incur additional costs associated with borrowing. Remember, when you borrow, you also have to pay back the money with extra on top to cover interest and charges and fees.
Using your savings is a safer option, and if you have enough patience, there are tips you can apply to help you save money for your remodel. It’s important to create a budget first. This will help you determine how much you need to save to get your project rolling. The amount you need to save generally depends on the size of your remodeling project and the type of renovation you’ll be doing. That’s why it’s important to do as much research as possible, so you know just how much the project is likely to cost and to give yourself ample time to prepare so you can adequately meet those costs.
If you have been wondering how do you finance a home remodel, the answer depends on your financial status and your goals. Whether you want to create a dream home where you can stay for many years to come or get the most out of your home when you sell, knowing the best way to finance your home remodel can make a huge difference. Be sure to consider all the important factors, such as your monthly budget and your ability to make repayments. You should also do your research to find projects that add real value to your home so that the investment is worth it.