As with all major purchases, remodeling often exceeds the amount of pure cash you have on hand to pay for expenses. Even if you could pay it off in cash, it is not always the best option. Here are a few things to consider when looking at ways to pay for your project:
- Credit Card – If you are planning a minor remodel, say less than $2000 for example, a credit card may well be the best option if you plan to pay it off shortly thereafter. Many cards today offer great perks for spending and you could possibly redeem your points for travel or a celebratory dinner at the completion of your project!
- Home Equity Loans – A home equity loan allows you to tap into the equity you have in your home to turn around and perform improvements. As an added bonus, the interest you will pay on the loan is usually tax deductable. Home equity loans by far are the most popular way to finance a moderate to large size remodel. Ultra low interest rates also make this an even more viable option to pay off the loan sooner rather than later.
- Home Equity Line of Credit – This type of loan acts much like a home equity loan except it is a line of credit that can be payed down and accessed again and again. This is a great option if you plan on doing multiple projects and are not completely sure of the overall costs of your renovations. You can easily use it like a checking account and avoid having to requalify for additional funding.
- Retirement Plan Borrowing – Some retirement plans (401k’s , etc.) will allow you to borrow against the monies you have saved. The interest rates are usually low because it is your own money you are borrowing against. However, you need to keep in mind that if you leave your job you will likely have to repay the loan in full or get hit with some hefty withdrawal penalties and taxes. There can also be more stringent time frames on loan repayment so do your homework if you want to explore this option.
- Life Insurance Loans – Some life insurance policies will allow you to borrow against the value of your policy. This can be an easy option because you just need to pay back the interest amount of the loan. You may, however, be lessening your death benefit if you happen to pass before the loan is payed off thereby leaving your family members with less of a death benefit.
- Non Traditional Loans – There are a couple of more risky options to finance a project. For one, you could take a margin loan against your stock portfolio. If your stock does well, you may not have to pay back the loan. If it declines, however, you may be forced to sell the stock.
There are federal loans available (Title 1 loans) that will allow you to perform only necessary repairs to your home if you qualify. These loans can only be used for essential improvements such as handicap accessibility, etc.
- Contractor Loans – This may seem like a streamlined way to have renovations performed. In my experience, this is not the most favorable option. At my company, we do not offer client financing. We do, however, work with several financial lenders to assist our clients in connecting with viable options to get a loan. I believe it is a more fair environment when a contractor is not payed 100% up front before they perform any work on your home (as they are when they finance you internally).
We hope we have shown you that there are lots of ways to get your project off the ground. Whatever option you choose, be sure to work with a reputable contractor to ensure you get the best possible experience your hard earned money can buy!
Dream Builders & Remodeling