| Posted in Financial Literacy, Lending
Home Improvement 101
One of the oldest stories in the book: You’ve lived in a house for years, and it needs an upgrade. You don’t like the look of it anymore, the feel, or maybe you just need the refresh for your own well-being. Whatever the cause, the outcome is the same: it’s time for home improvements.
While many home improvement projects center around common and well-trafficked areas, such as kitchens, living rooms, and bathrooms, sometimes home improvement involves fixing the plumbing or a sink, redoing the yard, fixing electrical problems and circuits, or patching problems in the house that are less cosmetic and more practical. Like with any project, this can quickly prove both time-consuming and expensive.
It's not uncommon for a kitchen or bathroom remodel to run into the thousands of dollars and upward. It’s a source of much (justified) stress for homeowners looking to fix up the old digs. No matter where you’re at in your project, be it in the dreaming stage or the hammer-and-nails stage, there’s always something to be said for good financial planning and responsible project management when it comes to home improvement.
Define the Scope, Visualize the Outcome
Let’s say we know the problem we want to tackle: a new outdoor yard space and sitting area, just in time for summer. This project will involve tearing out the old grass and seeding new grass, in addition to soil; we’re doing a retaining wall and a stone walkway, adding some yard furniture, a new patio, and finally, a fire pit for entertaining guests on warm summer nights. Looking at this breakdown, it becomes clear that the source of the problem is the cost. All these things added up are going to stack on to a steep bill.
You know the project, and you now know the price. You have a concrete grasp on what this will entail, the bill of goods, and how much time and energy will be needed to make this a reality. A great start!
Now what?
Financing the Project
Many people find they have the money for home improvement projects in cash, if the project is small and manageable enough, or if you’ve saved enough money for this exact reason. If you’re one of these people, then financing the project is about as straightforward as it can get. You go to the store, purchase the needed items on a credit card or write checks, and you have the materials delivered and either install them yourself or pay someone to do it for you. When it’s all done, it’s finished and paid for.
For even more people, however, there will likely need to be alternative options to pay for the renovation. In our scenario, let’s say the patio bricks have jumped in price, and we need to tackle the costs of those by dipping into our savings. This is certainly possible, but it comes with the proviso that dipping into savings should normally be a last resort – once depleted, the savings are gone, which can leave you vulnerable to other problems that may arise. If the home makeover is purely cosmetic, this and the scope of the project and its necessity can factor into your decision to finance.
For those who want to complete their full renovations or home improvements without using cash on hand or savings in the bank, financing options exist for this exact purpose.
Home Equity Loans
You can take out a home equity loan. A home equity loan is backed by collateral and usually (but not always) has higher interest rates than home equity lines of credit (HELOCs). A home equity loan allows you to take out a lump sum loan amount based on the equity you’ve built up in your home. If you’ve budgeted your project and know exactly what you want to do and how much it’ll cost, a home equity loan is often a safe and convenient way to finance the project. If you use the loan during the relevant tax year, you might also be able to deduct the interest you paid on your tax return (always make sure to consult with your tax professional). Win win!
Home Equity Lines of Credit (HELOCs)
The previously mentioned home equity line of credit (HELOC) is another way to borrow from the equity built in your home. Once you’re approved for the HELOC, you have access to a line of credit that can be drawn from over a certain window of time. Once this window of time is over, you only pay back the amount you borrowed. HELOCs are good for home improvement projects with variable budgets. Their financing flexibility means they can expand more than a home equity loan to pay off the increased costs of a home improvement project without worrying about an exact fixed price at the outset, which many people find changes as the project develops and evolves.
Cash Out Refinancing
If you’d like more cash on hand than the above options, you can initiate a cash out refinance. A cash out refinance lets you refinance your mortgage and take out a lump sum of cash from your home equity. If your house has a good base of equity built up, a cash out refinance can yield larger rewards. To take out a cash out refinance, you typically must have a certain amount of built-up equity in your home – the amount varies from lender to lender.
Mixed Strategy
It's very common to use a mixed financing strategy for home improvements. For example, in our hypothetical summer renovation project, you could find that new grass, plants, and yard furniture are all coverable by your credit cards, but that the stone patio and the retaining wall need to be covered by a HELOC or paid for from the cash out refinance. Maybe you’re more comfortable borrowing money to pay for the entire project and saving your money for future projects that you feel will need it more.
Improving the Home of Your Dreams, Step by Step
While much of your project can be covered with credit cards and savings or cash, it’s important not to overspend or overextend your finances while completing a home improvement. Many projects can run into the thousands, and sometimes tens of thousands of dollars. It’s always good to fix up your home, and adds equity, but you don’t want it to come at the expense of everything else.
The most important factor in any home project is one that extends to every facet of financial life: budgeting. A good budget is a practical necessity that will never steer you wrong, provided you approach it the right way. Make sure to browse for costs on items and materials for the project and look at bids from different contractors if it’s being hired out. Don’t cut corners, but make sure you’re looking at all options realistically in line with your desired spending level for the home improvement project.
With smart financing and a little know-how, your project is more doable than ever.