The national average on home improvement spending in the United States is $$39,858 with low-end remodeling and small projects costing up to $3,800 and multiple additions and remodeling reaching up to $138,000. Even a kitchen remodeling project can cost you $22, 125 on average while the additions are $42, 280 on the national average.
One thing is imperative from these statistics that you would need a considerable amount of budget to undertake any home improvements, renovations or remodeling. If you have been raising a home improvement fund all along and have saved up enough amount, you are good to go.
But, if you do not have money saved up and cannot delay the home repairs and renovations any further, you will need to look for financing options for home improvement. Even though there are different financing options available varying from mortgage loans to personal loans, it is a challenging decision for most of the homeowners.
A good home improvement financing option is efficient, have low-interest rate and has easy to understand terms along with great customer care services. The loan should be big enough to accommodate all your requirements and must be flexible enough to have an easy payment schedule.
So, how do you decide which financing loan is the best for you? Find it out here.
1- Personal Loans with No Collateral
This is the simplest type of loan with no collateral. It is usually for small amounts and is only good for small projects in home improvement. Homeowners choose personal loans when they do not have any equity in their home or do not want to risk their property or automobile for the loan. Personal loans are unsecured, and therefore, the loan amount is small, and interest rates are high with the speedy application process.
Positives
- There is no collateral which your property is not at risk.
- There is no appraisal required.
- The process is quick and simple, and you can get a loan even within 24 hours.
Negatives
- The interest rates are much higher than other equity loans.
- The loan amount is small.
- There can be hidden\n charges in the application process.
- The credit store matters, so only people with strong credit can get them.
2- Refinancing Mortgage
Refinancing is one of the most common options taken by homeowners when it comes to costly home remodeling. As the name indicates, refinancing is a secured loan in which you mortgage your home for more loan amount than outstanding amount on your home.
It allows you to take out cash against the equity of your home. In the situations where interest rates have dropped since you financed your home, refinancing can help you get lower interest rate and APR. If you are paying a flexible interest rate, you can change it to a lower fixed interest rate with refinancing.
For example, your home’s value is one million dollars. The outstanding amount is $4,00,000 which means that you have an equity of $6,00,000. In refinancing, the lender will let you loan an amount of $6,00,000 to pay off the previous loan and have money for the renovations. You will enter into a new financing contract with the lender.
Positives
- A loan for a large amount is available.
- A lower interest rate can be utilized as compared to the first-time financing.
- It has a fixed interest rate.
Negatives
- It is a secured loan which means that you are putting your home at risk for a higher debt than it was before.
- The application process is lengthy and complicated.
- An appraisal is required.
3- Home Equity Loans
The home equity loan is another common type of remodeling loans among homeowners where refinancing does not seem to be a viable option. Home equity loans are taken against the equity, i.e., your share in the home, but unlike refinancing, you only take the loan amount as needed for home renovation and do not pay off the outstanding loan. It does not affect your mortgage contract.
For example, your home is one million, and you have an outstanding loan of $4,00,000 which means that you have an equity of $6,00,000. So, the lender will loan you the specified amount such as $2,00,000 against your home equity.
If you the interest rates have increased since your home mortgage, it is better to choose home equity over refinancing option.
Positives
- It is a faster option than refinancing mortgage.
- The risk is lower than the refinancing option.
- The closing amount is usually lower than the refinancing.
- You can get fixed interest rate.
Negatives
- You can only loan a small amount which means it is only suitable for small projects.
- The interest rates are higher than the refinancing.
4- Home Equity Line of Credit (HELOC)
Even though it is also taken against home equity, HELOC is different than home equity loan. It works like a credit card. The lender approves a loan amount to you with a ceiling, but instead of getting it as a lump sum, you get credit amount which you can withdraw whenever you want. These loans have a withdraw period which can be as long as ten years and a repayment period which can be up to 15 years.
In the withdraw period, you can take out credit and pay small amounts in monthly bills which only have a little portion of capital along with interest. In the repayment period, you pay the large monthly amount to pay for the outstanding capital.
Positives
- You can withdraw as much as you want and whenever you want.
- The loan amount can vary from small to large.
- The monthly payments are small during the draw period.
- It can work for long-term renovation projects with a flexible budget.
- Closing rates are low.
Negatives
- The monthly payment during repayment period can be hefty.
- These are offered at a flexible interest rate, and the lender can increase it significantly.
- Homeowners tend to overspend when they have a flexible credit amount.
5- Credit Card
If you are thinking about a small renovation project, your credit card can work as fine with it as it does with online shopping when you do not have cash. You can withdraw amount for home improvements and pay it at the end of the month in the credit card bill. It is an easy and convenient way in which there is no lengthy application process.
But, you may need to pay much higher interest than other remodeling loans because of a higher interest rate on credit card.
Positives
- It is quick and easy without any long application process.
- You do not need an appraisal.
- You can withdraw anytime.
- You can also get an interest-free loan if your bank is offering an interest-free period.
Negatives
- The loan amount is small.
- The interest rate is anywhere between 16% to 22% APR.
6- Government-Backed Loan Programs
If you are looking for an extremely affordable loan option, you can consider Federal Housing Authorities 203(k) loan. It is specifically designed for the home improvement and renovation.
For the homeowners who have property at a good location with strong value but requires major renovations, this can be the most viable option. It is offered against the value of your home after improvement. For example, the current value of your home is $4,00,000, and its value will be half a million after renovation, 203(k) loans will consider its value as half a million.
Positives
- It is a highly subsidized loan option with a low-interest rate.
- You do not need a good credit score to secure the loan.
- It can provide a large amount of loan as it considers after improvement value.
- You do not need to have equity.
Negatives
- The application process is lengthy and complicated.
- Contractors and investors cannot qualify for this loan.
- You will need to strictly follow building codes regulation to ensure your renovation and additions are as per codes.
Conclusion
While there are various home improvement financing options with different pros and cons, you should consider your own home improvement goals to choose the right one.
Home improvements or remodeling are costly services. Therefore, these improvements must add value to your property, promising a return on investment. It is not likely that you can secure 100% of the investment of a home improvement project unless it is an eco-friendly remodeling. However, you must try to maximize your return.
After carefully considering project goals and ROI, you should check the interest rate, loan amount and flexibility of repayment to choose the best refinancing option.
