The cost of homeownership extends well beyond closing day. Homeowners want to make their properties their own, and that may involve a lengthy list of renovations to improve both the inside and outside of the property. When it comes to funding these renovations, homeowners have different options. The right choice may come down to how much equity a person has in their home and how one prefers to receive and pay back the money.
Home equity line of credit (HELOC): A HELOC uses a home’s equity as collateral and functions like a credit card, says NerdWallet. Borrowers are approved for a maximum credit limit and can get money during a “draw” period and only pay interest on what they use during that period. The draw period is usually 10 years. This makes it a viable option for ongoing renovations. It’s important to note that although a HELOC is highly flexible and a person only pays for what they use, these loans can feature variable interest rates.
Cash-out refinance: When current market interest rates are lower than the rate on a person’s existing mortgage, a cash-out refinance can free up money for high-cost renovations. Essentially, a borrower replaces their current mortgage with a new, larger mortgage and takes the difference between the two loans in cash at closing to fund the renovations. Since the loan is usually locked in with a fixed rate, the monthly payment remains the same, says Chase Bank.
Home improvement loan: People who have smaller projects or no home equity can work with a bank to get an unsecured loan that will provide a lump sum. These loans do not require a home as collateral, but will be based on credit score and other factors, and typically carry higher interest rates. U.S. Bank says funding can happen quite quickly, instead of waiting for a refinancing situation that requires a new closing.
Credit cards: Some people may choose to finance renovations on a credit card. This is best for minor, do-it-yourself projects that can be realistically paid off quickly and on cards that advertise an introductory 0 percent APR offer. This means the borrowing is free if paid off on time. Borrowers who use existing cards with higher interest rates (often 20 percent or more) should pay off the balance or face steep interest charges.
Government-backed loans: Borrowers may want to investigate loans that are backed by the United States government. These are issued for safety upgrades or when buying a fixer upper to revitalize a neighborhood. The Federal Housing Administration offers an FHA 203(k) loan to borrowers with lower credit scores. Fannie Mae HomeStyle Renovation Loan is an alternative to the FHA loan that allows for more luxury upgrades but requires a higher credit score.
