Financing Your Home Improvement Projects

Financing Your Home Improvement Projects

If warmer weather inspires you to give your home a fresh look or feel, join the club! Americans spend more than $500 billion a year on residential renovations and repairs, reports the Joint Center for Housing Studies of Harvard University, and the spring and summer seasons are prime time to begin.

What’s your pet project? Building a deck or patio? Remodeling your kitchen or bathroom? Replacing windows? Repairing the roof? Repaving your driveway? There are countless ways to make your home feel even homier — and potentially improve its market value. If the time or financial investment are holding you back, consider this: 93% of homeowners who responded to a recent survey by Today’s Homeowner reported experiencing a better quality of life after completing home renovations. That’s a pretty compelling argument for moving forward!

There’s good news, too, about financing your home improvements. If your savings doesn’t cover your anticipated expenses for updating, repairing or building out your home, there are a variety of financing options you can explore. Here’s a look at some home financing alternatives:

Home equity loan or line of credit

If you have built up equity in your home — meaning the market value of your home is higher than the amount you owe on your mortgage loan plus any other loans secured by your home — you may qualify for a home equity loan or line of credit. Because these loans and lines of credit are secured (your home serves as collateral), they may offer a lower interest rate than unsecured options such as personal loans and credit cards.

Here's how home equity loans and lines of credit compare:

A home equity loan is a fixed-interest loan that provides the borrower with a one-time lump sum of money in any amount up to the limit established by the lender (often 75-85% of the home equity). This type of loan offers the security of fixed payments, so you know exactly how much you need to budget each month until it’s paid off.

A home equity loan may be ideally suited to a home improvement project where you know what the price will be up front. If there’s a chance the project may go over budget, or if it’s a project that will be completed in phases over time, you may want to consider a home equity line of credit instead.

A home equity line of credit (HELOC) is a variable-rate, open-ended loan that gives you the opportunity to borrow money up to your preset credit limit (based on your home equity) whenever you need it, without having to apply every time. Depending on your lender, you may be able to access your funds by writing a check, making an online transfer or using a credit card.

With a HELOC, you receive a monthly statement that reflects how much of your line you’ve used, with a minimum monthly payment amount that can fluctuate based on your activity as well as current market interest rates.

HELOC may make sense for your home improvement plans when you’re unsure of the total project cost or when you’re expecting a drawn-out completion period with expenses popping up over time.

Cash-out mortgage refinance

This mortgage refinancing option entails paying off your existing mortgage with a larger one — an amount higher than your existing mortgage balance — and then receiving the difference in a lump sum to finance your home improvement project. Essentially, it enables you to take equity out of your home in the form of cash.

A cash-out refinance may be a good option if you are able to get a lower interest rate on the new mortgage than on the existing one. Be sure to factor in the costs of this type of transaction, however: You may need to pay points and other closing costs, and the term of your mortgage loan may be extended, so it may take longer to pay it off.

Personal loan

Note: Personal loans that are intended for home improvement projects are often called “home improvement loans.” This term is imprecise, however, because it could be argued that any type of loan you take out for home improvement could be labeled as such. For the purposes of this article, we use the term “personal loan” as follows.

A personal loan, or personal term loan, is an unsecured loan, meaning you don’t need to put up collateral (e.g., home equity) to qualify. The lender will instead look at your credit score, income and other financial criteria to determine your creditworthiness for the loan. Your creditworthiness is likely to influence your interest rate, too: People with strong credit tend to earn lower interest rates on personal loans.

With a personal term loan, you pay a fixed rate of interest over the life of the loan, which can protect you in the event interest rates rise. You’ll have a fixed monthly payment, too, so budgeting is easier. Those payments may be larger than you might have had with a home equity loan, since personal loan terms are usually limited to five or seven years, while home equity loan repayment periods may span decades.

One of the reasons many homeowners decide to go with a personal loan versus a home equity loan or line of credit is that application can be easier, and funds may be available more quickly. Home equity loans and lines require a property appraisal since the property is used as collateral; that step is unnecessary in the personal loan application process, since these loans are unsecured.

Specialized loan

Dollar Bank has designed a home improvement loan with new homeowners in mind. The Home Works Home Loan requires little or no equity, depending on the borrower’s circumstances, and offers special extended terms to help keep your fixed, monthly payments low. Most home improvements are eligible, and qualified borrowers can borrow up to $50,000.

Credit card financing

If your home improvement project has a relatively small price tag — one that you anticipate being able to pay off quickly — then credit card financing may be a good choice. Here’s what to keep in mind: Annual percentage rates (APRs) charged on outstanding credit card balances can be high relative to some other financing choices. If you are unable to pay off your balance right away, those interest charges have the potential to snowball from month to month.

An ideal solution may be to take advantage of the 0% APR introductory rate some credit cards offer new card holders. The Dollar Bank Rewards Credit Card, for example, charges no interest for the first 12 months you have your card, enables you to earn 1.25% unlimited cash back on purchases and has no annual fee. So, you can cover smaller expenses with your card as you go or charge a larger amount all at once. As long as you pay off your balance before your 12-month introductory period ends, you will avoid paying interest on that portion of your project financing.

To learn more about home improvement financing solutions, visit your local Dollar Bank office or call us at 1-800-242-2265.