Your home is more than just a house. It’s where you create memories with friends and family. It’s a reflection of you and your personality. It’s a financial investment. And, since the pandemic started, it’s a place where you spend a lot of time!
Customizing your living space to fit your needs and building an environment where you feel comfortable is a common goal among homeowners. However, deciding the right way to finance these projects can be quite confusing.
From upgrading furniture to remodeling a kitchen or even putting in a pool, there are a variety of financing options available. To find the solution that will work best for your project, review the following alternatives below.
Credit cards are a great option when performing minor upgrades that aren’t too costly. They’re convenient and allow you to start your projects immediately. However, they’re also one of the most expensive financing options available.
If using your credit card, make sure to create a plan to repay the balance quickly. If you know you will not be able to pay off the entire balance right away, it may be in your best interest to consider a personal loan.
Similar to credit cards, personal loans are unsecured loans and offer two significant benefits:
You’re approved for a set amount that makes staying within budget easier.
Since personal loans have set monthly payments, you’ll often pay off the balance quicker and pay less interest versus only making minimum payments on a credit card.
Personal loans are an excellent option for mid-sized projects around $10,000 or less. These could include upgrading furniture, installing new carpet, painting your home, or customizing a home office.
Home Equity Loans
One of the greatest perks of owning a house is the ability to tap into your home’s equity. You can borrow against your home’s equity to fund extensive or ongoing home improvement projects.
A home’s equity is calculated by: Home Value – Amount Owed = Home Equity
For example, if your home appraises for $200,000 and you owe $150,000 on your mortgage, your home’s equity could be $50,000. You can then use a portion of this equity through a home equity loan.
Since home equity loans use your house as collateral, the interest rates are typically much lower than personal loans or credit cards. Plus, the loan terms usually range up to 10 years, making the monthly payments more affordable.
There are actually two types of home equity loans – each with its own perks:
- Home Equity Loan: A traditional home equity loan provides you with the funds you need for your home improvement upfront in one lump sum. These loans are great options if you know the total amount of your project ahead of time. For example, if the new pool you plan to build costs $40,000, you would receive the full amount at the time of signing your loan paperwork.
- Home Equity Line of Credit: Unlike a home equity loan where the funds are dispersed upfront, a Home Equity Line of Credit (HELOC) allows you to choose when to spend the loan amount. For example, if you’re approved for a $40,000 HELOC, you can spend $2,000 now and still have $38,000 to use later. And you only repay what you borrow – not the total approved amount.
Once you repay the borrowed amount, you can then draw on the funds again throughout the life of your loan. A HELOC is an excellent option if you have ongoing projects, such as remodeling several rooms in your home, as it gives you more flexibility than a traditional home equity loan.
Another financing option involves refinancing your existing mortgage and is called a cash-out refinance. This is when you refinance your first mortgage and draw on your home’s equity at the time of refinancing.
Using our example above, let’s say your home appraises for $200,000, and you owe $150,000. If you refinance your home for $180,000, you would be opening a new mortgage for $180,000 – giving you $150,000 for the original owed balance, plus you will receive $30,000 in cash at the time of closing (a portion of your home’s equity).
One major drawback of this type of financing is that you’re typically required to pay closing costs on the new mortgage, which can be costly. This option works best if you’re already planning on refinancing your home in order to take advantage of lower interest rates.
The most significant perks of this option are that mortgage rates are usually much lower than other financing options, and the loan terms can be upwards of 30 years. These longer loan terms make the additional monthly payment to your mortgage considerably more affordable.
We’re Here to Help
When choosing a loan for home improvement, there isn’t necessarily a “right” or “wrong” choice. In the end, you want to select a loan that provides you with the funds you need for your remodeling while paying as little as possible in interest.
For guidance on which financing option will work best for your project, we’re here to help. Please stop by any of our convenient branch locations or call 248-322-9800 extension 5 today.
© Genisys Credit Union and www.genisyscu.org, 2022. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content.