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A Guide to Financing for Home Improvement

Whether you’re a long time homeowner looking to spruce things up, or just recently bought a fixer-upper, home improvements can be a daunting challenge. Figuring out how to finance it can be even more of a task. This guide to financing for home improvements will walk you through the process and make undertaking a renovation a lot more manageable.

Planning home improvement

First thing you need to do is plan your home improvement. Depending on how big the project is, you may even need to meet with a contractor to help you complete it. It’s essential to have a framework in mind whether you are completing the project yourself or using a contractor. The National Homebuilders Association suggests things such as:

  1. setting a schedule
  2. requesting a written proposal
  3. requesting a written lien waiver when the work is complete

You may have never heard of asking for a written lien waiver from your contractor, but if they used sub-contractors for any of the work, then the contractor is responsible for paying those sub-contractors, not you. Having this waiver is important because the document verifies that those workers were paid.

Figure out your financing

Now that you have a plan in place and a trusted contractor picked, you need to take a look at how you’re going to pay for your home improvements.

  1. Cash – This is obviously the easiest, most straight-forward way to pay. If you have the funds available, not having to worry about financing is nice—and so is knowing that your home renovations are paid for.
  2. Home Equity Line of Credit (HELOC) – This type of loan uses the equity that you have built in your home to obtain the funds to pay for a home improvement. This type of loan uses your home as collateral, so it’s a lien on your property, just like any other type of mortgage.
    But with a HELOC, you can use it, pay it down, and still have access to the line of credit. You will also get to deduct the mortgage interest points from your taxes, if you itemize your deductions.
    Interest rates for HELOCs are typically pretty low and the term is usually several years- 5- to 15-year terms – so that keeps the payment relatively low. This type of financing is good for larger loan amounts, like $50,000 or more.
  3. Credit cards – If you have access to a line of credit on a credit card, this can get you the cash that you need very quickly to pay for your home renovation. However, it can make a huge difference in how you use your credit card to pay for the home improvements. For instance, if you pay for it as a regular charge, the interest rate may be pretty high because it will be compounding at the standard interest rate. However, sometimes, credit card companies will send you checks that can be used to access cash and those may have short-term deals of low or 0% interest for a set period of time, such as a year or two. Using these checks typically have some sort of associated fee associated, so make sure you know the details of the offer before using them. Credit cards should only be used for smaller home improvements, of less than $15,000.
  4. Personal loans – These are unsecured loans, so you don’t have to use your home as collateral. But like a HELOC, personal loans can be taken out for longer periods of time, and offer higher loan amounts. However, because they are unsecured, like a credit card, the interest rates are often higher. Because personal loans are relatively easy to apply for and usually offer larger amounts than credit cards do, it may make sense to choose a personal loan for medium sized projects – between $15,000 and $50,000.

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