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What’s the best way to pay for a home remodel project?

couple financing home remodel project
June 23, 2017

By Thomas Muellner

Updated bathroom fixtures, new hardwood floors, a fresh coat of paint -- it’s easy to get swept away by the allure of a home improvement project. Not only are remodels exciting to plan, they can do wonders for the value of your property while adding a refreshing, personal touch to your home. But what’s the best way to get started?

Before you lace up your work boots or request a bid from your local contractor, it’s important to consider the financial implications of any home project. Whether your budget is $500 or $5,000, understanding all of your options for how to pay for a remodel can make a major difference in keeping your budget in check. By planning ahead and finding the payment method that’s best for both your financial situation and project goals, you’ll be able to enjoy a fabulous addition to your residence while strengthening your foundation.

Pay up front for small projects

When it comes to small projects, like painting your living room or installing a smart home thermostat, it’s best to keep it simple and pay cash up front. This helps ensure you get the best bang for your buck without the added burden of interest payments. You’ll also have an easier time sticking to your personal budget since you’re not adding another reoccurring payment to the mix.

That said, if you’re absolutely sure you can pay off your statement balance in full at the end of the month, a credit card is also a safe bet to use for smaller projects. But as always, be sure to err on the side of caution, especially if you decide to open a new card with an introductory 0% APR offer for your home renovation. Even budget-friendly projects can get out of hand when you’re paying an extra 20-25% in interest thanks to your credit card balance.

Take advantage of home refinancing

For larger projects, it may not be feasible to get your hands on a large sum of cash to cover costs. Even with a healthy savings account, most people still need to borrow for things like adding a second bathroom or remodeling the kitchen.

In these situations, a savvy way to find the funds you need while improving your long-term ownership position is to refinance your home.

By opting to refinance, it’s possible to lock in an improved interest rate and lower your monthly housing payments. This frees up extra cash for home improvement projects, savings and everyday living expenses. If you’ve built up equity in your home, you can even elect to “cash out” a portion of the refinance amount to cover the improvement expense.

In fact, this is a smart move even if you’re not working on home improvements since you may end up cutting your interest rate and reducing your monthly payments. You also get the same tax benefits and interest deductions as you would on a standard mortgage.

The big thing to look out for if you go this route is that you’ll likely be responsible for paying for a second round of closing costs, similar to when you first purchased your home. Your home may also be subject to inspection and appraisal. Still, depending on your new rate, there’s a strong possibility it’ll be a win-win for you and your family in the long run.

Consider a home equity line of credit or equity loan

If you’ve already locked in a stellar interest rate or you want flexibility when drawing funds, a home equity line of credit (HELOC) may be your best bet. Ideal for medium- and large-scale projects, HELOCs enable you to access funds over an extended period of time without withdrawing the entire sum at once. In practice, it’s similar to having a credit card specifically for home needs, only with more favorable terms.

By borrowing against the value of your property, homeowners typically are able to secure a better interest rate than an unsecured personal loan or credit card. Repayment terms are also very advantageous, generally with options to pay back the loan over the course of up to 15 years. This can be an especially attractive path as your home value increases due to the home improvements..

Similar to HELOCs, home equity loans offer ready access to funds, only in a more traditional lump sum payment schedule. Again, this a smart option if you’ve got a major renovation project that is likely to improve the overall value of your home. It beats carrying a balance on your credit card and provides better repayment terms than an unsecured loan.  

Red flags to avoid

With any home improvement project, you should evaluate both your short-term budget constraints and long-term investment implications. This means choosing projects wisely and focusing on those that will truly improve your home’s value.

While your heart may be telling you to install a gazebo or hot tub, these pet projects may not carry the same ROI as more practical options, like adding a second bathroom or updating appliances. When in doubt, don’t hesitate to consult a local real estate agent or hire a home decorator for an afternoon to generate project ideas that you’ll both enjoy as a homeowner and help add to the equity in your home.

Putting all of the financial pieces together before you begin your home improvement project may take extra effort, but you’ll be glad you did once you finally call it a wrap.