Home Equity

What Is The Best Way To Finance Home Improvements

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 5 minute read

It’s possible to pay for high-return home upgrades even if you don’t have a lot of money to spare. When it comes time to sell your home, making modifications that yield a high return on investment may improve your quality of life as well as increase the value of your home. Don’t worry if you have a few improvement ideas but don’t know how to pay for them all – you have choices.

There are a variety of options available to homeowners looking to fund home repair projects, ranging from home equity products to personal loans. For your convenience, we’ve put up a list of possible sources of funding. If you’re unsure about which home renovation projects are worth your time and money, we’ve compiled a list of the best bets.

What are your alternatives for financing home renovation projects?

In some cases, you may be able to borrow against your property’s equity to fund home improvement work. If you don’t have any equity in your home, you may want to look into alternative financing options like credit cards or personal loans. A few options for funding future home renovation projects are as follows:

Home equity line of credit (HELOC)

Revolving credit lines backed by the equity in your house are known as home equity lines of credit (HELOCs). As long as you keep your payments up to date, you’ll have access to a credit line. A HELOC approval is based on several variables, including your credit score, equity in your property, and your debt-to-income ratio.

In order to be eligible for a mortgage with a lower debt-to-income ratio, you’ll need a credit score of at least 700 and at least 15% to 20% equity in your property.

Home equity loan

Another option for borrowing from your home’s value is a home equity loan, which is frequently referred to as a second mortgage. With a home equity loan, you receive a lump sum of money and pay back the loan over a period of time that may be as long as 30 years.

Loan terms and interest rates are generally determined by a borrower’s credit score, debt-to-income ratio, and equity in their house. Depending on your salary, credit history, and home’s worth, you may be eligible to borrow up to 85 percent of the equity in your house.

Cash-out refinance

Cash-out refinancing involves refinancing your house for a higher amount than the outstanding loan balance and withdrawing the additional funds as a lump sum. To put this in context, let’s say that if you now owe $400,000 on your house loan, you may refinance your loan to $425,000 and utilize $25,000 for upgrades.

Lenders will also look at your debt-to-income ratio (DTI), credit record, and the value of your house when deciding whether or not to accept you for a refinance. Freddie Mac estimates that closing fees for refinancing can run as high as $5,000 on average.

0% APR credit card

Home improvements can be paid for using credit cards with 0% APR introductory offers. The promotional term of 0% APR credit card deals typically lasts 12 to 24 months, after which the interest rate rises to its usual level. New purchases are eligible for 0% APR on the Chase Freedom Flex (14.99 percent to 23.74 percent variable) for the first 15 months.

The best paint colors for selling a home are eggshell or beige, so you buy these in quantity on a zero-interest credit card. To get an interest-free loan, you must pay off the sum before the 0% APR term expires. To qualify for one of these credit cards, you may need a credit score of at least 760, which is considered outstanding or exceptional.

Personal loan

Loans from internet lenders, banks, and credit unions are known as personal loans. In a contrast to credit cards and other lending products, installment loans often have shorter terms and lower interest rates. Even if you have excellent credit, lenders may look at other variables besides your credit score when deciding whether to accept you for a personal loan at the best possible interest rates.

Avant and LoansUnder36% are two examples of lenders that may be prepared to deal with clients with less than stellar credit scores. Lenders also look at your income and debt-to-income ratio (DTI) to see if you can keep up with your loan payments.

FHA Title I loan

Title I loans from the Federal Housing Administration can be used to pay for repairs and improvements that increase the value of your house. Items like a new dishwasher or oven might be purchased to make your house more comfortable. Non-essential “luxuries” like a pool, hot tub, or sauna are not eligible for FHA Title I financing.

For a single-family house, the maximum FHA Title I loan amount is $25,000, with a maximum loan duration of 20 years. New homeowners who don’t yet have enough equity to qualify for a HELOC or a home equity loan may find this perfect because there isn’t a minimum equity threshold.

There is no minimum credit score requirement for an FHA Title I loan, but lenders will verify your credit to make sure you are not a high credit risk. The government doesn’t set the interest rate; instead, you and the FHA-approved lender will figure out the rate.

A word of caution on borrowing from your 401(k)

401(k) loans may be used to fund home improvement projects if you have enough money in the account. However, you should think twice before applying for one. Taking money out of your 401(k) to repay a loan means that you will not be able to reap the benefits of compound interest throughout the loan period. It’s possible to expand your nest egg through compound interest, which occurs when interest is compounded over time.

A 401(k) loan may be taxed as a distribution if you can’t repay it, and a 10% tax penalty might apply if you’re under the age of 59 1/2. In the end, whether or not you borrow money from your 401(k) is up to you, but you should be reasonably confident that you can repay the loan before doing so.

Five home repair projects that provide the best return on investment

Trying to figure out which home improvement projects pay off the most? According to the Remodeling 2020 Cost vs. Value Report, these are the upgrades that homeowners get the most benefit from when they put their homes on the market (www. cost vs value.com).

  • On average, a homeowner may expect to return 95.6 percent of the cost of installing stone veneer on the outside of their property when they put it up for sale.
  • Selling a home can help you recover 94.5 percent of the cost of installing a new garage door, which typically costs $3,695.
  • Painting the walls, changing cabinet doors, drawers, hardware, appliances, countertops, and flooring in a basic kitchen makeover costs $23,452 on average, and homeowners recuperate 77.6% of the expenditure.
  • For a cost of $17,008, fiber cement siding is a long-lasting exterior covering built from wood and cement, with homeowners recouping 77.6 percent of their investment.
  • Installing polyvinyl chloride (PVC) siding on a typical home costs $14,359, with a return on investment to homeowners of 74.7 percent.
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