Once you decide to move forward with a home improvement project, the first step is to understand how much it will cost you. We know saving up can be difficult, so you may want to finance the renovation. The best way to finance a remodel will depend on many factors, so it’s important to understand each one before deciding.
The Best Ways to Finance a Remodel
This option might be a standard credit card or a retail card from a place like Home Depot or Lowe’s for labor, materials, or both. Ideally, it would have a 0% APR introduction period offering cash-back rewards. Be careful not to get into more debt by putting an amount on the card that will take you a long time to pay or accrue a lot of interest.
Home Improvement Loans
These are unsecured personal loans, which means you can get pre-qualified and see your potential interest rate and monthly payment. This perk is helpful because you can see whether the loan repayment fits into your budget.
Home improvement loans are outstanding for larger projects that may take several years to pay off, but the lender will set a maximum borrowing amount, and most loans must be repaid within 12 years. Also, most lenders can get you the funds within a week, so these loans are great if you want to start immediately.
Home Equity Loans
Using equity means replacing your current mortgage or getting a second home loan. You can borrow up to 85% of your home’s value minus what you still owe. Your home is the collateral, so failure to make payments means the lender could take ownership of your home.
These loans have fixed interest rates and monthly payments, and the repayment term is usually 15 years or less. For equity loans, you will need a home appraisal and potentially need to pay closing costs. These are best for applicants with good credit scores that get access to good interest rates.
The interest you pay on these loans is tax deductible, but there are also some huge risks. If your property value declines for any reason, you could go upside down on your mortgage.
Home Equity Line Of Credit
This refinancing option is a revolving line of credit you can take from up to the borrowing limit as needed. To use a home equity line of credit, you should have at least 15 to 20% equity in your home. Unlike home equity loans, these have variable interest rates. Monthly payments could change over time, but payments made to interest can still be tax deductible.
Home equity lines of credit offer flexible repayment terms, but many give you ten years to spend the money and 20 years to pay off the balance. These are great options when you don’t know how much the project will cost.
The Federal Housing Administration offers Title 1 loans to qualified borrowers for up to $25,000 for a single-family home. Any amount over $7,500 requires your house as collateral. Most loans will have a repayment term between six months and 20 years.
Government loans can pay for all or some of the project, but only if they improve livability or accessibility. Government loans are a great option because applicants often save on interest and insurance. The main requirement for eligibility is a debt-to-income ratio of 45% or less.
Cash-out refinancing is a good option for applicants that can’t afford an additional monthly loan payment and could qualify for a better interest rate. This option replaces your mortgage with a higher mortgage and a new interest rate. The cash you receive is the difference between your old mortgage and the new one.
Also, if you have a variable interest rate on your mortgage, you can refinance it to a fixed rate. But, for this option, you must pay for a home appraisal, taxes, closing costs, and other fees.
Choose the Best Option For You
Figuring out the best choice depends on a lot of factors. Your credit score, current mortgage, and estimated project cost are the main things that will impact your decision.
Once you’re ready to get going with a loan to update your home, contact us at Minnesota Home Improvements. We will guide you through completing the project in the most efficient and cost-effective way possible. Request a quote today to get your initial estimate!