Whether you’re dreaming of a new kitchen, a bathroom remodel or adding a pool in your backyard, it’s no secret that home renovations take a lot of time and money. In fact, a Rocket Mortgage report found that people end up spending $15,000 on average per renovation project.
While renovations can ultimately increase the value of your home, how you consider financing the projects depends on your financial situation.
“The best financing option depends on your financial situation, project scope and long-term goals,” said Blake Whitten, a financial advisor at Whitten Retirement Solutions. “Consider costs, interest rates and potential returns before deciding, because while cash is straightforward, it can create limitations for other opportunities. Consulting a financial advisor can provide personalized guidance for your circumstances.“
If you have enough savings to cover the renovation costs without depleting your emergency fund or sacrificing other financial goals, consider paying with cash, said Ben Waterman, co-founder of Strabo.
“It eliminates the need to take on debt and avoids interest charges. Additionally, paying with cash provides a clear understanding of your budget and limits the risk of overextending yourself,” Waterman said.
Home Equity Line of Credit (HELOC) and Home Equity Loan (HEL)
Some experts argue that homeowners with substantial equity in their homes should use a HELOC to help fund their renovation projects.
“You’ll pay interest compounded only on the amount you draw, versus the total equity available in your credit line, yet have the ability to draw on the line of credit (i.e., borrow) multiple times from an available maximum amount,” said Kyle Enright, president of Achieve Lending.
Enright noted that some people don’t want a HELOC because they’ll generally have a variable interest rate — meaning payments can change over the life of the loan, making it harder to budget for.
“However, some fixed-rate HELOCs are now available,” he added. “At Achieve, for example, fixed-rate HELOCs can help homeowners borrow up to $150,000. These loans can be especially useful for major expenses such as home renovations.”
Another option for a homeowner with substantial equity in their home is a HEL.
“Here, you will receive the entire amount of the loan upfront. These loans have fixed interest rates, so monthly payments will not change,” Enright said.
Consider using credit cards to pay for home improvements, but only if you know you can pay off the balance in full when the bill arrives. Otherwise, the interest is prohibitive, Enright said. When you also take into consideration that the average credit card interest rate is 20.82% (as of the week of July 5), according to CreditCards.com, you might want to consider using it only for smaller, cheaper projects.
On the flip side, using credit cards for home renovations has its advantages.
“A credit card can offer protection. If you need to dispute a transaction (for example, for materials purchased for a renovation), and have paid with a credit card, you can report it to the card issuer,” Enright said. “You will not be responsible for the charge until the credit card issuer resolves the dispute.”
In addition, using a credit card will provide an opportunity to improve your credit profile.
Home Equity Agreement (HEA)
HEAs are alternatives to reverse mortgages and home equity loans and may help homeowners cash in on the equity in their homes without needing to meet strict credit or income requirements, according to Consumer Affairs.
In essence, a HEA is a non-debt option for homeowners who want to access the equity they’ve built in their homes. They receive a lump-sum cash payment in exchange for a portion of the home’s future value, said Michael Micheletti CMO at Unlock Technologies.
Micheletti explained that an HEA is not a loan, so there are no monthly payments, no interest and the qualification threshold is lower than traditional loan products, often with flexible income requirements.
“Homeowners continue to live in their home as usual and they can buy back the equity any time during the term of the agreement — typically 10 years — or when they sell their home,” Micheletti said.
According to him, this is an excellent option for a homeowner who needs cash now and doesn’t want to take on additional monthly payments that would come with a loan option.
Are Home Renovations Worth It?
To determine if renovations will increase your home’s value enough to justify paying interest, Whitten suggests a few tips. First, research the local real estate market to see if renovated homes command higher prices and calculate the potential return on investment. You could also consult a real estate professional for insights on improvements that yield the best returns in your market. Finally, assess the preferences of potential buyers in your area and focus on improvements that appeal to a broad range of buyers.
As Sebastian Jania, owner of Ontario Property Buyers, noted, when deciding what renovations should be done with debt, one should really consider if the renovation will create a “wow factor” for the home.
“A ‘wow factor’ is going to be renovating anything such as a bathroom, kitchen, painting the property or improving the curb appeal. While there is something to be said about property enjoyment and potentially using debt to finance this, one should consider the cost of paying debt to have a renovation done now. If this will create equity in the property through forced appreciation, then there is a larger case for using debt,” he said.
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