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Making the right financing choice can make all the difference when improving your home.
Key points
- Home improvements can be expensive.
- There are several options to cover the costs of home improvements.
- Saving for improvements is ideal, but you could also tap into home equity or borrow using other types of loans.
If you are upgrading your home, you’ll need to determine the best way to pay for any changes you are making. The good news is, there are multiple different financing options you can consider.
There are pros and cons to each different method of paying for home improvements, so be sure to consider each of these four choices carefully to decide which one is best for you.
1. Paying cash
If you are able to save up money to pay for your home upgrades out-of-pocket without borrowing, this option can be a great one. You’ll be able to avoid paying interest, so you won’t add additional unnecessary costs. And since you won’t be committing to a future monthly payment, your home improvement project won’t affect your finances for months or even years in the future.
There are downsides though. You may end up tying up a lot of cash in your home that you could’ve used to do other stuff — such as investing. You may also need to wait a long time to make upgrades if it takes you months or years to save the money you need.
2. Tapping into home equity
Since you’re improving your home, it can make sense to borrow against the equity in your property in order to do so.
You could do this by taking out a cash-out refinance loan, which would mean you get a whole new mortgage to pay off your old loan but borrow an additional sum of money on top of what you currently owe. This could be a good choice if you can reduce the interest rate on your existing home loan, as this option can sometimes save you money in the long term.
You can also take a home equity loan or line of credit, each of which allows you to borrow using your home as collateral without affecting your current mortgage.
The benefit of borrowing against home equity is that you will generally end up with a lower interest rate than other kinds of debt, and you should be able to deduct the interest if you itemize on your taxes since you’re using the money to improve the property. There are downsides, though, including high closing costs and the fact that using your home as collateral for the loan puts you at risk of losing the property if you can’t make payments and the lender forecloses.
3. Taking out a personal loan
A personal loan is another good financing option for home improvements. Some big benefits of this type of loan over a home equity loan include the fact that getting approved should be faster and easier and you can avoid paying high closing costs. You also should be able to get an unsecured loan, and that means you won’t have to risk your house. The downside, however, is your personal loan will probably have a higher interest rate than a home equity loan would.
A personal loan also has benefits over another option — credit cards. You’ll have a fixed payoff period and usually a lower interest rate with a personal loan compared to credit cards. But you may not get to take advantage of unique benefits cards can offer, such as a 0% interest period or credit card rewards.
4. Using a credit card
Finally, a credit card is another option. Credit cards can be a fast and easy way to access money, which is a huge benefit. If you can qualify for a card with a 0% introductory APR on purchases, you might even be able to borrow interest free for around a year to 15 months — which can make financing home upgrades cheaper. And you could potentially earn points, miles, or cash back for charges on your card.
The downside, however, is that you may not be able to get a large enough line of credit to finance the improvements, and you could end up paying interest at a high rate if you don’t pay off the loan before the card’s standard rate kicks in. Your payoff timeline can also be long and uncertain if you make only minimum payments.
Ultimately, each of these options is worth considering and you’ll want to weigh the pros and cons of each before deciding which is best for you.
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