44% of owners plan to renovate this year. Here’s how to finance your next project
Renovating your home is a great way to make your living space more comfortable. You might also end up adding resale value to your home during your renovations.
In a recent LightStream survey, 44% of homeowners said they intended to renovate their property this year. That’s an increase from 2021, when just 39% of homeowners had renovation plans.
But if you don’t have a lot of money in your savings account for home improvement purposes, you may need to borrow money to make your renovations. Here are some options to consider.
1. Take out a renovation loan
A renovation loan is a personal loan intended for home improvement. The advantage of getting a home improvement loan is that you may be able to borrow relatively affordably. And if you have a great credit score, you could get a low interest rate on your loan.
Also, personal loans are unsecured, so they are not tied to any specific asset. If you fall behind on your loan payments, you won’t risk losing your home like you would with a home equity loan or line of credit (HELOC).
Now, that’s not to say you shouldn’t keep up with your loan repayments. Being late on any loan obligation could cause serious damage to your credit score and lead to other adverse consequences. But if you don’t like the idea of your home being used as collateral for a loan, then a personal loan may be your best bet.
2. Tap your home equity
These days, American homeowners are sitting on record levels of equity thanks to rising home values. Equity refers to how much of your home you own and is the difference between the market value of your home and your mortgage balance.
There are several ways to tap into the equity in your home to finance a renovation. First, you can take out a home equity loan, where you borrow a lump sum of money and pay it back over time. You may find that you are able to get an even lower interest rate on a home equity loan than on a personal loan.
A HELOC is another option worth considering for a renovation, especially if you’re not sure how much the work will end up costing you. With a HELOC, you don’t need to tap into the full line of credit you’re approved for. If your renovations cost less, you can borrow less – and earn interest on less.
A final option to consider for tapping into your home equity is a cash refinance, which allows you to trade in your existing mortgage for a new one with a higher balance than your current balance. This extra money is money that you can then use for any purpose, for example to finance a renovation.
The downside of a cash-in refinance is that you have to go through the process of underwriting a whole new mortgage. But the upside is huge – the potential for big savings on the amount you borrow. This is because mortgage rates are still at competitive levels right now. If you borrow some money via cash refinance to renovate, you could pay less interest than you would with any of the aforementioned choices.
What’s the right call?
If you’re looking to renovate this year, you have options, especially if you’ve been in your home for a while and have built up some good equity in it. Do some research so you can find the most affordable way to borrow.
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