Paying for Your Home Improvement Projects

Thinking about tackling those home improvement projects you’ve been eyeing for a while? Maybe you want to upgrade your kitchen, replace outdated fixtures, or turn a closet into a new office space. As you go down your list of home improvement projects and begin calculating the cost, you might be wondering how you’re going to pay for everything.

Home improvement costs can quickly add up, and most people don’t have the extra money tucked away in a savings account to cover the costs. While you might not have enough saved up to cover your to-do list, the equity you’ve built up in your home since you’ve owned it might be able to help. Home equity is the difference between what you owe on your mortgage and the home’s current market value. Here are a few options that would allow you to use your home’s equity to help finance your next home improvement project.

Home Equity Line of Credit

A Home Equity Line of Credit (HELOC) is a revolving line of credit that allows you to borrow from your home’s equity. It has a variable interest rate and works similar to how a credit card works, only secured by your home. You’re able to borrow up to a certain percentage of the equity you have in your home (depending on your lender, it may be 80% or more) minus any existing first mortgage balance. With a HELOC, you can withdraw the funds that are needed for your project as things come up. You will have a certain amount of time to use the money from the HELOC and a certain amount of time to pay it back. Here are a few pros and cons for a HELOC.

Pros

• You can use the funds for any reason.
• Offers a lower interest rate compared to credit cards and personal loans.
• The interest paid on a HELOC may be tax-deductible. Talk with your tax advisor for questions when interest is deductible.
• Closing costs vary but are typically lower compared to a Cash-Out Refinance.

Cons

• HELOC has a variable interest rate, which means it may fluctuate, causing your monthly payments to change.
• The temptation to overspend because of the flexibility to borrow multiple times from your line of credit.
• Your home is used as collateral. You risk losing your home if the loan isn’t paid off.
• If your home value decreases, you could potentially owe more than what your home is worth.

Home Equity Loan

A Home Equity Loan is an installment loan paid out in a lump sum at the beginning of the loan. This loan is often referred to as a second mortgage. The Home Equity Loan has a fixed interest rate and monthly payments. Same as the HELOC, you’re able to borrow up to a certain percentage of the equity you have in your home (depending on your lender, it may be 80% or more) minus any existing first mortgage balance. Here are a few pros and cons of a Home Equity Loan.

Pros

• You could use the funds for any purpose.
• The interest paid may be tax-deductible. Talk with your tax advisor for questions when interest is deductible.
• The interest rate and monthly payments are fixed for the life of the loan.
• Fixed monthly payment that you can factor into your budget.
• Closing costs vary but are typically lower compared to a Cash-Out Refinance.

Cons

• The interest rate is typically higher than a HELOC.
• Your home is used for collateral, which means you risk losing it if you stop making payments.
  
  

Cash-out Refinance

Cash-out refinance is another option for funding your home improvements. A cash-out refinance allows you to refinance your current mortgage and get cash out to cover other expenses you might have. The amount of cash-out you’re able to get will depend on how much equity you have in your home and other lender requirements. This option may be good to consider if you can secure a lower interest rate than your current mortgage rate. Here are a few pros and cons of a cash-out refinance.

Pros

• You’re not limited to how you can use the funds. You could use them for debt consolidation, pay off credit card debts, home renovations, vacation, education, etc.
• You could potentially secure a lower interest rate on your new mortgage than what you had on your original mortgage.
• The mortgage interest paid may be tax-deductible. Talk with your tax advisor for questions when interest is deductible.
• Fixed monthly payment that you can factor into your budget.

Cons

• The closing costs and other fees could range from 2% to 5% of the mortgage.
• Your home is the collateral. If you don’t make your monthly payments, you risk losing your home.
• The new mortgage will have different terms. Be sure you understand the new terms (interest rate and fees) before you agree to the loan.
• By replacing your current mortgage with a new one, depending on the new term of your loan, you could be extending how long it will take to pay off your home.

Most Common Home Improvement Projects

Home improvements can increase the value of your home. If you’re trying to decide where to start, consider projects that could potentially give you the best bang for your buck. Here are six common projects people use their home’s equity for:

Kitchen renovation:

Giving your kitchen an updated look with new energy-efficient appliances, updated countertop, new hardware for cabinets, and updated flooring could range from $13,292 - $37,611.*

Bathroom remodel:

Updating your bathroom with a new vanity, toilet, faucet, and flooring could range from $6,123 - $15,374.

Roof Replacement:

Replacing a roof typically range from $5,395 - $11,030.

New deck:

Building a new deck could range from $4,153 - $11,213.

Window replacements:

Replacing your windows could give your home a refreshed look and save you on energy costs. The cost typically run $3,000 - $10,000.

Don’t wait any longer! You have several options to finance your home improvement projects using your home’s equity. Choosing the best option that meets your needs and budget will get you closer to enjoying your new kitchen and office space.

*Home repair estimates and average costs provided in this article were from Homeadvisor © 1999-2019 HomeAdvisor, Inc. All rights reserved. AllSouth strives to keep its information accurate and up to date.