Ready to finally make your house your dream home? Deciding how to pay for the house remodel you want can be quick and easy.
People across the world upgrade their houses to make them more comfortable or to increase their value. Whatever the scale of a house remodel, it comes with some financial implications. A Harvard University study projected that Americans would spend $340 billion on upgrading or repairing their homes in 2018.
Given that the cost of construction materials is ever increasing, home renovation is becoming more expensive every year. The situation worsens when the project necessitates hiring a contractor. Major improvements, repairs, or modifications can see homeowners spend a fortune.
With these factors in mind, how can you pay for your house remodel comfortably? Let’s look at what to consider before a home makeover and explore some of the available financing options.
House Remodel: How to Go About the Budget
Home remodeling is a big deal, and you have to be careful with your budget. Failure to think it through can lead to underfunding or a needless surplus that you will pay at an interest. Before you even shop for funding to fix your home, digest the following points.
Evaluate the Need for Remodeling
Is the home improvement project necessary in the first place? Though a difficult question, you can approach it by asking yourself why you need to renovate.
If the improvement aims to add the resale value of your home, consider a substantial makeover like a kitchen renovation. It’s a wise decision when you are looking to sell the house soon after. Simple additions like sinks won’t have much significance.
Research in Depth
Start by assessing the extent renovation required and estimate the cost of materials necessary to complete the project. The nature of the job will determine whether you can do it yourself, or you will need to hire a contractor.
Doing some of the work by yourself is an excellent way to cut costs. However, it’s a terrible idea if you don’t have the skills. Consider the cost of contracting the job if you cannot handle it.
Keep the Project within Budget
A home upgrade can cost significantly more than your initial estimates. Even with a reasonable approximation, you may have to meet some unexpected costs along the way.
Include a reasonable buffer in your budget to cushion you from unplanned expenses. For instance, in the course of rebuilding a wall, you can accidentally damage some electrical cables. You will fix them at a cost.
Consult a Construction Expert
A professional builder will rarely go wrong when giving renovation opinions and quotes. Find a reputable contractor in your neighborhood or online. If you have done your estimates, present your offer and see if you can work something out with them.
Options of Paying for a House Remodel
There is no one ideal way of financing a renovation. Depending on your situation, you can finance your home remodeling project using one of the following avenues.
If you are undertaking a low-dollar house renovation, a cash payment would be excellent. However, it depends on the amount available, and the much you would be willing to spend.
Some value-adding house remodels like painting or fixing the floor of a bathroom are relatively inexpensive. They could require a few thousand dollars that you can finance out of pocket.
This makes more sense than going through the lengthy process of securing a loan, for example. You avoid charges like the origination fee and interest.
Just like with cash, credit cards can fund small improvements in your home. Apart from renovations, a credit card finances repairs and the acquisition of appliances on demand.
If you choose to go this route, be sure to pay if off the soonest possible. Your best bet may be a service with zero percent interest introductory rate. It will give you some grace period to make payments without accumulating interest.
Some credit cards come with several reward programs, such as points, cash back, and miles. Using such a service to pay thousands of dollars for a house remodel can earn you considerable bonuses.
Home Equity Loan or HELOC
When you have a mortgage, you can use a home equity loan or a home equity line of credit (HELOC). Both options are ideal for minor house remodels.
A home equity loan is a fixed-term and fixed-rate loan. A HELOC, on the other hand, is a revolving loan on your home that works like a credit card. You can spend the line of credit and pay it off severally over the term of the loan.
In principle, home equity loan and HELOC are second mortgages. Depending on your situation, you can take up to 90 percent of the equity in your home.
As with a typical mortgage, these financing options take your home as collateral. Therefore, the bank foreclosure your home in case you default the loan.
Though giving out your house as security can be terrifying, it enables you to access lower interest rates. Still, the interest paid on a second mortgage qualifies you for a mortgage tax deduction.
A HELOC might be the right option if you have built significant equity on your home. You should be in a position to pay the renovation cost in a few years.
This refinancing method also requires you to have equity in your home. It allows you to refinance your house and at closing, you take cash out. You can borrow from 80 percent to 90 percent of the value of your home, but terms may vary.
You get a fixed rate and fixed term with cash-out refinancing. It also offers low payments since the loan period can extend for up to 30 years. With such a plan, you free up your cash for other commitments and investment.
The disadvantage of cash-out financing is that you have to pay closing costs, which could exceed $2,000. The fee depends on the lender. The closing costs are often similar to the ones you pay when buying a home.
Fortunately, not all cash-out refinancing plans involve closing costs. An example is when you take a higher interest rate to compensate for this charge.
A cash-out refinancing loan with no closing cost is excellent when you are not planning to stay in your home for long. With 80 percent equity and a decent credit score, you not only get a fair interest rate but also evade private mortgage insurance.
Home improvement loans target people intending to buy fixer-uppers and do a makeover on them. The loan allows you to borrow against a future appraised value of your home. Therefore, you get a considerable amount of money to work on renovations.
There are two types of home renovation loans – Fannie Mae HomeStyle and the FHA 203(k) program. HomeStyle is cheaper than the FHA option. However, it limits your expenditure on the renovation to 50 percent of its proposed future value.
If you need maximum funding for a house remodel project, you might want to go with FHA 203(k). Take an example of an old house whose fair market value is about $50,000 currently. The owner intends to renovate it, and an appraiser estimates its value to hike to $160,000 after repairs and improvement.
The homeowner can secure a renovation loan of $160,000. However, he doesn’t have to take it all up if it isn’t necessary.
Renovation loans provide a reliable source of house remodel funds. Their downside is that they come with relatively high closing costs and interest rates. FHA 203(k) usually attracts more charges than Fannie Mae HomeStyle.
An alternative loan that you can takeout for home upgrading is a personal loan. If your credit score favors you, the lender can offer you fast cash. Your FICO score must be good or excellent to qualify for this loan and the lowest rates.
You won’t have to put up your real estate as collateral, so your home will be safe. On the flip side, unsecured loans have higher interests than home equity loans.
You also have to repay them within a few years, say three to seven. However, they may be your best financing option if you have little equity on your home but a high credit score.
Private lenders are individual with enough capital to loan others. They operate like hard money lenders, but most of them are open to negotiations. Instead of charging interest, some act as partners and share the proceeds of your house remodel deal.
You can fish for private lenders at real estate networking events or online.
A house remodel can be expensive, but there are various ways of paying for it. You can use your savings, credit cards, private lenders, as well as loans to finance your project.
Some funding options are more expensive than others, but the cost covers the risk that the lender takes. Sourcing external funding means you are using someone else’s money to revamp your home. Even if you pay some interest, the profit you make pays off in the end.
The bottom line is to validate your reasons for renovating and borrowing the right amount. With a solid repayment plan, there is no reason for shying off from renovation projects.
For questions on house remodeling, be sure to post them in the comments.