From minor paint jobs to second-story additions, most home owners have extensive lists of remodeling projects they want to address. Finding the right financing option, however, can be a little intimidating unless you know what’s available and what suits your situation.
It goes without saying that cash is the best way to finance your home improvements. For homeowners who plan to stay in their homes long term and have a number of small remodeling projects to address, completing projects in phases as cash becomes available is an excellent way to avoid paying interest on loans.
If your projects are somewhat larger, you may also want to consider shifting other assets to finance your remodeling project in cash. If, however, those assets are paying dividends and you need to complete a large-scale project swiftly, you’ll need to investigate other options.
Refinance Your Mortgage
The second best option is refinancing your mortgage. If you’ve held your mortgage at a fixed rate for several years, it’s likely that there are better financing options available. In this case, you’ll benefit from refinancing while also freeing extra cash for side projects.
Take out a New Loan
If your current mortgage rate is competitive with other available options, you’ll need to take out a second loan. Here, there are several options. The basic types are listed below.
Construction loan: Construction loans are best for large-scale projects such as major additions. Construction loans can be harder to obtain and often come with multiple terms because money is released in phases to finance various stages of the building process. These loans are short-term and transition into mortgage loans upon project completion. They are typically used when your new project requires more cash than the equity in your existing home.
Home equity loan: For home equity loans, you’ll need to know exactly how much your project will cost because you’ll be required to take out a fixed amount up front and repay a fixed amount within your loan’s terms. These loans are less expensive than construction loans and are the better option for most midscale renovation projects.
Home equity line of credit: a home equity line of credit is one of the best possible options so long as your personal finances are stable. You’ll be able to borrow as you need it and pay it back as you have it, provided you make minimum monthly payments. This loan has a lower interest rate than construction of home equity loans, but they are riskier since failing to make a payment can result in losing your home.
Select the Right Loan for Your Finances
Each of the options above correlate to specific home improvement goals and homeowner finances. If you’d like help working through your individual finances to maximize your loan amount to match your income and to prep for interest payments, review This Old House’s loan calculation article.