Home improvements are super expensive and often require a huge chunk of money in order to bring them to fruition. Depending on the size and scope of your particular project, you could be looking at a small fortune to make the needed and desired improvements on your home. Many homeowners simply don’t have that kind of liquid cash in their bank accounts.
Luckily, there are different ways that you can fund your home improvement project without having to sell everything you own or beg your family and friends for money to cover this expense. Here are a few options you may want to consider to help you finance your next renovation.
1. Home Equity Line of Credit (HELOC)
If you have any equity built up in your home, you may be able to use it to fund your next home improvement project. With a HELOC, your home is essentially used as collateral and allows you to borrow a specific amount of money based on how much home equity you have.
Somewhat similar to the way a credit card works, a HELOC allows you to withdraw money from your credit line against your home equity, which is charged a set interest rate. You would then be responsible for repaying the amount borrowed every month.
The draw period for a HELOC is typically 10 years, but that can fluctuate based on your lender and your particular situation. During this draw period, you’re allowed to borrow against your home equity up to an agreed-upon limit and make monthly payments that incorporate the interest and a portion of the principal on the outstanding balance.
The repayment period is when you would pay off the entire debt in full, and typically lasts approximately 15 years. The payments made during this time frame will likely be higher because you’d be paying more towards the principal portion of your debt.
The great thing about HELOCs is that you can deduct your expenses come tax time if the money was used for significant improvements to your home. You can deduct the interest on a limit of $750,000 of home equity debt.
It should be noted that borrowers need to make sure they are financially capable of repaying their HELOC. If you fail to make their payments, you could lose your collateral – in this case, your home.
2. Home Equity Loan (HEL)
A home equity loan is similar to a HELOC in that you borrow money against the equity in your home and use your property as collateral for the loan. However, it differs in that a HEL does not involve a revolving line of credit like a HELOC. Instead, you take out a certain amount of money – as you would with a conventional loan – and pay it back in fixed installments with interest over time. Home equity loans can range in length from anywhere between five to 30 years.
Home equity loan amounts depend on the value of your home – which an appraiser will determine – and the amount of equity that currently sits in it. Like a traditional mortgage, you’ll have to pay a certain amount in closing costs, though these amounts are typically a lot less compared to a traditional home loan.
3. Construction Loans
You may be able to qualify for a construction loan in order to finance your home improvement project. These types of loans are typically used on a short-term basis – typically around one year – which allows you enough time to complete your project and provide the funds needed to pay for it. Construction loans are designed for projects that are significant in nature and are not suitable for smaller renovations.
The funds are not given in one lump sum; rather, they’re released at stages. Typically, money is given when specific phases of the job have been completed. Once the job is done, a new loan will usually have to be taken out in order to pay off the construction loan.
4. Mortgage Refinance
If the current mortgage rate is lower than the rate you’re currently locked into with your mortgage, a refinance might be a great way to save some money at a lower rate. You can kill two birds with one stone by taking advantage of less in interest payments and freeing up some money that can be used to be put towards a renovation.
Essentially, refinancing means paying off the first loan and creating a second loan with a lower rate. By doing so, you can effectively cut down on your monthly mortgage payments that will allow you to use those extra funds to finance a home improvement project.
You may even want to consider a cash-out refinance, whereby your existing mortgage would be refinanced and the new home loan would be for a larger amount than your current loan. In turn, you would get the difference in cash. That said, a cash-out refinance should only be considered if you are certain that the improvements you make on your home will increase its value.
5. FHA Title 1 Loan
Homeowners can use FHA Title 1 loans to get access to necessary funds to make improvements on their homes. Buyers can even use these types of loans on top of their original mortgage to fix up a home they’re purchasing.
An FHA Title 1 loan is specifically used for home improvements. Loans under $7,500 typically are unsecured; all you would need is your signature. However, larger loan amounts will require collateral; namely, your home. These loans are usually made for no more than $25,000.
Only lenders who are FHA-approved are able to offer Title 1 loans. You don’t need any equity in your home to qualify, and the money you borrow can be used to pay for any home improvements that are not considered excessive.
The Bottom Line
If you don’t have a large lump sum of money lying around to pay for a home improvement project, you still have options. The above financial products can help make your renovations a reality. Not only are they relatively easy to obtain, they can also help you add some extra value to your home once your project is done. Speak with a mortgage specialist to find out which option is right for you.