How to Pay For Your Home Improvement Project

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Looking to do a home renovation project this Spring, but aren’t sure how to pay for it? You may need to take out a loan. Here are some possible loan options to consider if you need a little help financing your home improvement or construction projects.

Construction Loans

A construction loan should be considered for large projects only, like building a new house. These loans can either be obtained from the homebuilder or prospective owner. They may be hard to acquire, however, due to a lack of collateral – a completed home. Construction loans are usually short term with variable rates that make them higher than the rates you’d see on permanent mortgage loans. To be approved, a lender will need to see detailed construction plans, the construction schedule, and a budget. If approved, you will be put on a bank-draft schedule that follows the construction stages of the project. During the construction, you will likely only be expected to pay interest. The lender will typically dispatch someone to check on the progress of the house whenever funds are requested. When your house is completed, the construction loan will typically be rolled over into the home mortgage.

Home Equity Loans (HEL)

Taking out a home equity loan means taking out a second mortgage on your home. Home equity loans tend to be pricey. There are transaction fees and closing costs, much like your primary mortgage, and the interest rates are typically higher because they come with guaranteed fixed-rates. Most people opt for a fixed-rate home equity loan for a renovation project because all the money is received up front and the payment schedule is locked in with a set monthly payment for the term of the loan. In general, you will have to pay back the principal and interest on a home equity loans within 15 years.

Home Equity Line of Credit (HELOC)

A home equity line of credit works a lot like a credit card. Instead of getting all the money up front like a home equity loan, you receive an open line of credit. This is a good option if you want to borrow money for projects over a period of years. Terms vary, but in general, a typical HELOC will allow you to access the credit line for 5 to 10 years. You will have to pay interest on whatever you borrow and then you’ll typically have around 15 years to pay the loan back. Interest on a HELOC only accrues when you borrow funds, but keep in mind that it’s an adjustable rate mortgage. This means the rate can fluctuate and you could end up paying a much higher rate than a fixed home equity loan.

Unsecured or Personal Loans

For medium-sized projects, between $15,000 and $50,000, you might want to consider a personal or unsecured loan. Like the 0% interest credit card, these loans are simple to apply for and don’t require collateral. However, the interest rates are often higher on personal and unsecured loans than they are on HEL or HELOC loans. Make sure you carefully compare the terms, annual percentage rate (APR), and any other costs associated with each loan before committing to one.

Low-Interest or 0% Credit Cards

If you have a solid credit rating you’ll likely receive offers for 0% interest credit cards. For small projects under $15,000, these offers can be a good option if you are able to pay off the cost before interest kicks in. These cards are easy to apply and qualify for, and you don’t risk your home with this kind of unsecured loan. The low-interest rate timeline for these offers are usually 12 to 18 months, so carefully consider your financial situation and ability to make payments within that time frame. If you can, consider setting up an automatic payment to ensure you pay off the full amount.

Acquiring a loan is a good way to make your home renovation projects a reality, but before you apply for any type of loan, make sure you work out the projected costs, estimated completion date, and a budget. To do this you’ll need to research and contact several reputable contractors to get quotes and timelines for the project. Consider hiring a professional who can help you evaluate the various loan options, and talk you through how they can affect your money, taxes and your goals.

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