When it comes to taking on a big home renovation project, one of the biggest questions homeowners have is, “how will I finance the project?”. About 90% of homeowners in the U.S. plan to invest in a home remodeling project at some point, so learning about the different options for financing is an important part of the home renovation process. The benefits of home loans as a financing option for a home renovation project can be great if you’re prepared for the different responsibilities required with each option. Here are some of the most popular financing options and different benefits of home loans for your home renovation project.
Common Loans Used For Home Renovation Projects
Home Equity Line Of Credit
A Home Equity Line of Credit, also known as a HELOC, is one of the most popular options when it comes to financing home renovation projects. It’s a great option for projects that are on a bigger scale or more expensive, such as new roofing installation or knocking down and rebuilding walls. A Home Equity Line of Credit is a secured loan that is backed by your home, meaning your home is put up as collateral for the loan. This is intimidating for many people, but if you set up a plan to ensure that you make payments on the loan when required, the benefits of this option can outweigh the negatives.
A Home Equity Line of Credit is similar to a credit card in that you have a total limit that you can withdraw from whenever you need. The benefits of home loans like this for a long home renovation project are huge. You won’t have to worry about opening multiple loans when the sources have run out, you can withdraw when you need to, make payments, and then continue to withdraw. Using the roofing services example again, a roofing project can take a long time, especially if unnecessary repairs come up along the way. This kind of loan is great for a home renovation project like that.
However, if you are not in a place financially where you can make consistent payments on a loan, the benefits of home loans for a home renovation project do not outweigh the cons. Because your house is used as collateral for this type of loan, you have to be very sure that you are prepared to take on the financial responsibility of a Home Equity Line of Credit.
Home Equity Loan
A Home Equity Loan, more commonly known as a “second mortgage”, is where a homeowner will use the equity in their home as collateral to get a lump sum of money. Like most loans, you receive the lump sum of money all at once and pay it back over a set number of years. One of the benefits of home loans like a home equity loan is that you have a fixed interest rate; once you lock it in, it won’t change over the life of the loan, even if there are fluctuations in the market. So if you’re able to get a good interest rate when you apply for the loan, you will save yourself a lot of money.
This is a good option for homeowners who have a big project where they know at the start the total funds they’ll need. For example, if a homeowner is purchasing solar panels to be installed on their roof, they could talk with some different solar panel installation companies to get bids, select one, and then know the total funds they’ll need for the project from the very beginning.
One caution is that projects can often end up costing more than the original estimate, so you may want to get a loan for more than the total cost of the project. If you have funds leftover after the home renovation is completed, you can always use them to pay back the loan.
Similar to a Home Equity Line of Credit, your home is put up as collateral for this type of loan. So before you sign off or even start looking into the benefits of home loans like a Home Equity Loan, you will want to be sure that you’re financially stable and will be able to meet payment deadlines.
Refinancing your mortgage is another loan option many homeowners consider when they are trying to figure out funding a home renovation project. The main difference between refinancing and a Home Equity Loan is rather than adding an additional mortgage, you replace your mortgage with a higher total and new interest rate. The funds you get are the difference between the total for your old mortgage and your new mortgage.
The benefits of home loans like refinancing can be very beneficial for homeowners looking to fund a medium scale project. The main benefit is that you get to keep the cash difference between the two mortgages. The second main benefit is that you can also get a lower interest rate on your mortgage with refinancing, which can ultimately save you thousands of dollars. Because this loan option would give you a smaller amount of funds than a Home Equity Line of Credit or Home Equity Loan, you should consider this option for projects such as a garage renovation where you’re planning to replace the garage flooring or fix your garage door.
Going with the garage example, this size of this loan option is great for a project where you aren’t planning to entirely renovate a whole space, but do smaller projects in a space to spruce it up. For example, you could fund a new garage door installation or refinish the concrete flooring in the garage.
While this seems like a perfect option for financing a home renovation project, there are some drawbacks you need to be aware of before committing to it. Because you are adding to your total mortgage, you will likely be lengthening the life of your mortgage. If your interest rate doesn’t go down by much, you will end up paying a lot more money in the long run. All in all, you should really only consider refinancing if you can get a significantly better interest rate.
While not typically specified as a home loan, a personal loan is a common option many homeowners use to finance their home renovation projects. Personal loans are one of the easiest types of loans to be approved for. You can apply at your local bank, a credit union, or even with a private provider. Personal loans, unlike a Home Equity Line of Credit and Home Equity Loan, don’t require you to use your house as collateral. You will generally just have to provide proof that you have income enough to make the payments on the loan. Some lenders will transfer the funds into your account in as little as one day, so this is a great option for emergency renovations, such as an emergency air conditioning repair during a hot summer, or a broken window repair.
The benefits of home loans, or personal loans in this case, in regards to home renovations are great. You don’t have to worry about having large collateral like your house placed on the loan, so if your income is not as large, this is a better option. Like refinancing, personal loans are a good option for midsize renovation projects. It’s also a good option for someone who does have some savings prepared for a project but doesn’t have enough to cover all of the fees. For example, if you’re working with a commercial contractor to make renovation plans, a personal loan would help you to cover their fees as well as cover the cost for the materials you’ll need for the project.
Some things you will have to consider before applying for personal loans are your credit score and income. Your approval will be based on these things, so as long as you are financially stable and have a good credit score, you should be able to find a few different options. Don’t settle on the first you find. There is a wide range of payment plans and interest rates, so do some searching around before you pick the best option for you.
When To And When Not To Use A Home Loan For A Renovation Project
Before you decide to start looking into the potential benefits of home loans for your home renovation project, you need to consider whether your project really warrants a home loan or not. While some options are better financial choices than others, if your project is a smaller scale or the size and cost are unknown at the beginning investing in a home loan may not be a wise decision. Here are some examples of projects that would be a good fit for a home loan and some that are not a good fit.
Projects You Should Use A Home Loan For
The benefits of home loans are generally best when it comes to midsize and large scale home renovation projects. Or even a long term project where you’ll need additional funding for a few months is a good fit for a line of credit loan.
For example, if you’re working on a roofing project, you’ll generally have to pay a large sum of money to cover the materials, labor, and payment for the workers and residential roofing contractors on the job. Depending on how much work needs to be done to replace or repair your roof, this could be a very expensive project that requires a lot of funding homeowners don’t typically just have saved up.
Another example would be a project that requires removing walls and altering wiring and insulation. You may have to hire a few different professionals to help with a project like this which means paying multiple different companies. Having a larger fund to pull from, such as sources from a home loan, will help to ensure that you have enough to cover it all.
Projects You Should Not Use A Home Loan For
Projects that are smaller scale may not be a great fit for a home loan. If you need a few hundred dollars or less to complete a project, its generally a better idea to save up cash and pay for it that way. Invest in a smaller loan with a high interest could mean you pay almost double the total because of the interest that accrues.
For example, if you’re needing to get some commercial cleaners out to your house to do a deep clean for a sale or if you’ve just purchased a new home, that is something you should just pay for with cash. If you can’t pay for it right away, save up for it before you hire them. The hassle of applying for and taking out a loan should not be applied in a project like this.
Another example would be a project where you need to hire an electrician to fix or alter some electrical wiring in your home. Depending on the size of it, you may not need a loan. If they’re fixing the lights in one room, that’s something you should save up to pay in cash or on a credit card. If it’s a bigger project that involves multiple rooms and more detailed work, you may want to look into a smaller loan.
Planning for and conducting a home renovation project is a big task, and generally a very expensive task. Most homeowners will not have enough funds saved up to pay for a big project with cash and will be looking for alternate sources for funding. The benefits of home loans for funding a home renovation project can be great as long as the homeowner does their research and proper preparation to ensure that they pick the best option for their specific project. If you use this list of commonly used home loans and suggestions for projects that do and do not warrant a home loan, you will be well on your way to funding your home renovation.