Making improvements on your home can be a great investment and improve your living space so you can enjoy it for many years to come. What is the best way to pay for home improvements? There are many options and in a perfect world, having the money already set aside and saved would be ideal. But, we don’t live in a perfect world. Sometimes we need to finance. Especially when it comes to larger expenses. So what type of financing would be best for home improvements? Below we have outlined several different options concluding with the option we think is the best way to finance your home improvements.
Here are some options:
Credit cards can work for minor touch-ups, but funding bigger projects this way can have devastating effects.
1. You may be stuck paying high interest until you pay off the balance on your card.
2. Your credit score may be negatively affected by the large, unpaid balance on your card.
These short-term loans may or may not be secured by a form of collateral.
1. Upfront costs and interest rates can be high.
2. Receiving the entire amount in one lump sum can lead to overspending.
Home Equity Loan
A home equity loan is a loan that’s secured by your home’s value. Home equity loans allow you to borrow a fixed amount of cash, which you receive in one lump sum.
1. Upfront fees can be high.
2. Receiving all the funds at once can push you into spending more than you need.
3. The amount you borrow may not be enough.
Retail Credit Cards
Some retailers encourage customers to finance home renovations on a store credit card.
1. Retail credit cards can have very high interest rates.
2. With so much credit extended to you, you may be tempted to overspend.
Enter the home equity line of credit (HELOC)
A HELOC is an open credit line secured by your home’s value. HELOCs have adjustable interest rates and have a “draw” period for accessing the funds.
Here are the benefits of a HELOC:
1. You’ll save money
HELOCs help you stick to your budget since you can withdraw money from your line of credit as needed, instead of all at once. Upfront costs for HELOCs also tend to be lower than those of other loans.
2. Flexible terms
Some lenders allow you to convert large withdrawals into fixed-rate loans. Some also extend your credit line when the draw period ends.
Also, because you’re only paying interest on the money you withdraw, you’ll have the freedom to take out a larger line of credit and decide how much of it to use later.
3. You’re improving your home’s value
It makes sense to borrow against your home’s equity in order to add to its value. When you sell your home, a HELOC may actually pay for itself, and then some.