If you’re like most homeowners, you are constantly thinking about all the ways you could improve or upgrade your home. Maybe you’d like to add a deck or renovate your kitchen? Maybe you’d like to remodel your bathroom or add another bedroom? Maybe you’d like to include some fencing, do some landscaping, or finally build the pool you’ve always dreamed of?
Whatever plans you may have for home improvements, two things are clear. It’s probably going to cost a lot more than you think. According to HomeAdvisor, an average kitchen upgrade can easily cost $20,000, and a bathroom remodel can set you back $9,000 or more.
Second, if you don’t have the cash in hand, you’re going to have to figure out how to pay for those improvements. Fortunately, there are many financing options available to you.
Home Improvements as an Investment
Renovating or remodeling is a great way to make your home more livable and as result, it might induce you to stay put for a longer period of time. However, according to Zillow, the average family lives in their home for just 7 years before moving. Since it’s likely that one day you’ll move, it’s important to know which improvements add value to your home, since it can translate into recouping more of your money when you sell.
Kitchens - Prospective homebuyers demand modern conveniences, appliances, and designs in the kitchen. As a result, kitchen improvements tend to add genuine value to your property, especially in older homes. Of all the major home improvements, updated kitchen features are probably the most valuable.
Bathrooms - Second only to kitchen upgrades are remodeled bathrooms. People expect bathrooms to be up-to-date with the latest designs, features, and fixtures. Again, a renovated bathroom usually results in a good return on your investment.
Outdoor improvements - First impressions are very important to homebuyers, so sprucing up your home’s exterior appearance is a smart investment. This might include upgraded siding, lighting, walkways and landscaping, particularly in the front yard. Even something as simple as replacing the front door can make a huge difference.
Roofs and windows - Roofs and windows are expensive to replace, but buyers expect these elements to be in excellent repair and condition. Unfortunately, while replacing them won't dramatically increase your home’s resale value, not replacing them could significantly decrease it.
Home Improvement Financing Options
The common culprit standing between most home improvement dreams and cold hard reality is money. Home improvements can be expensive, but the good news is that there are many ways to come up with the money needed for renovations.
Until recently, borrowing money for a home improvement meant going to the bank, seeing a loan officer, and hoping for the best. However, in today’s competitive financing market, you have lots more options—even if your credit history is less than perfect.
With so many lenders, loan options and terms, it also means that loan shopping can be confusing. However, you can avoid a lot of the confusion and find the right lender and loan, if you do a few things on the front end:
- Know how much money you’re going to need and roughly how much you qualify for from the start.
- Narrow your loan options down to the ones that match your needs and finances.
- Concentrate on the lenders that are most likely to provide you with the type of loan you want.
Here are some options for homeowners to consider for financing their home improvements:
Obviously, this is the easiest and best way to pay for the cost of your home improvements. You won't have any future payments to make and won't infringe on the equity in your home. If money is an issue, perhaps it makes sense to only tackle one small project at a time, paying in cash as you go.
Refinance your mortgage
This is a great option for homeowners who would anyway benefit from refinancing. It’s possible you could get all the funds you need to finance your improvements, and obtain a lower mortgage interest rate in the process to boot.
Home equity line of credit
If you already have a desirable first mortgage, a home equity line of credit might be a good option. With a HELOC, the money is drawn out as you need it and you pay it back at your own pace, as long as you make minimum monthly payments. You don't pay interest until you use the money, the equity line is usually good for 10 years, and it’s also often renewable.
Home equity loan
With a home equity loan, you borrow a fixed amount and make fixed payments over a designated period of time. A 15-year term is typical, but with some lenders you can go as short as five years, or as long as 30 years.
Typically, a construction loan is used to build a house or make major renovations. It might be worth considering when you're building a major addition that will cost more than the equity you have in your home. Generally, a construction loan is a short-term loan, and when the home or renovation is complete, you roll it into a traditional mortgage loan
Borrow from your 401(k)
Most 401(k) programs allow you to borrow money from your account and pay it back over five years, usually via payroll deduction. However, if you leave your job, the balance will be due immediately.
Federal Housing Administration 203k loan
These loans are typically used to buy a house that requires a lot of repairs. They can also be used for refinancing, however, and the requirements are similar to those of other FHA loans. However, one downside is that you will have to carry mortgage insurance for the life of the loan.
FHA Title 1 loan
Borrowers can acquire these loans of up to $25,000 for home improvements, and they are insured by the federal government. FHA Title 1 loans are available from approved lenders at market interest rates, with terms of up to 20 years, and the homeowner is not required to have equity in their home.
If you are 62 or older, you can get a reverse mortgage based on the amount of equity you have in your home. Reverse mortgages are more expensive than refinancing or home equity loans, but you aren't required to pay them back until the home is sold or you move.
Some home improvement contractors have relationships with finance companies and might offer to arrange funding for your project. However, this is usually not a very good idea. You will almost always be better served by securing your own financing.
Undertaking home improvements can be a wise investment and they can also make your home more livable, but it's important to make sure you choose the best financing option for your personal situation.