Home improvement projects generally fall into two categories: necessary repairs, such as fixing a roof or a replacing an air-conditioning unit, and improvement projects that may increase the value of your home, such as a remodel or addition.
Regardless of the project, high costs can put a damper on your improvement plans. Blake Pullin, Texas manager for Regions Mortgage, offers the following advice for home improvement payment options.
Plan ahead
The most affordable way to pay for any project is with cash. Pullin recommends using the Regions cash flow calculator to identify savings opportunities.
Before you begin a project, determine how much money you can afford to set aside each week to pay for it. Then, set up an automatic transfer from your checking account to your savings account after each paycheck is deposited.
While this option may require you to postpone a project, it will allow you the freedom to pay cash.
Some projects, though, are unexpected. For emergency repairs, Pullin suggests applying for a home equity line of credit. Ideally, this should be done before a need arises so you have the capability to access same-day funds when an emergency happens. It can take up to 45 days to get approval — and you should be aware of inactivity or other potential fees — but having access to immediate funds may be worth the effort. “It’s designed for you to have peace of mind on days when emergencies come up,” Pullin said.
Choose the best financing option
If you don’t have cash on hand to make improvements to your home, there are four common home improvement loan options that can help you access the needed funds.
- Home equity loan or credit line: These generally have larger loan amounts and more flexible terms than unsecured loans and the interest may be tax deductible. However, the approval process can be lengthy as some lenders require income and employment verification, as well as a home appraisal. For the home equity term loan option, you pay interest on the full balance of the loan and have a fixed rate. If selecting the home equity line of credit option, you'll only pay interest on funds you draw from the line of credit, but your interest rate can adjust over time. Certain states, such as Texas, have restrictions on these type of loans so it’s important to understand all loan options to select the best one to meet your needs.
- Term loans: Unsecured personal loans may be approved within three or four business days, but the payments and interest rates are typically higher than home equity loans or lines of credit. Also, the terms on these loans are much shorter — usually 1 to 7 years — which creates a much larger monthly payment and may restrict your monthly cash flow.
- Renovation loans: Renovation loans can give you access to money for more extensive home improvement projects which involve a licensed builder or contractor. This type of loan will generally have better terms and rates than a home equity loan or line of credit, but it’s important to compare the two and decide which best meets your needs. Renovation loans can cover projects as small as a kitchen remodel or small addition to your home to an extensive project such as a full tear down and rebuild of your home. During the renovation loan process, the bank checks the background and experience of the builder you select for the project, reviews the plans and contract you signed with them, and monitors the progress of work performed by the builder throughout the renovation process to ensure the project is being completed in a timely manner. The bank monitoring of work completed by the builder is one key difference between a renovation loan and an equity loan/line of credit. The bank will fund your builder in stages/draws after an inspector verifies work completion and after you, as the homeowner, agree to the funding.
- Financing from the service provider: While some service and product providers offer financing options, it’s best to compare the rates and terms offered to the other options mentioned above to find the solution that best meets your needs.
Take Advantage of Government Rebates and Tax Deductions
In addition to the tax deductions that may be possible using a home equity loan or line of credit, Pullin recommends talking to your accountant and investigating other rebates and deductions based on your project. There may be state or federal rebates for energy-efficiency products, he said, such as solar panels and high-efficiency appliances. If you are making your home accessible for someone with a disability, you may be eligible for medical expense deductions.
While making your home safe or even comfortable is important, many borrowers still experience financial strain after all their bills are paid. That's why, before embarking on any project, Pullin suggests sitting down with your banker to talk through your cash flow and debt management plan. Your banker can help you start your project with realistic goals that give you confidence that you're not only improving your living arrangements, but also your financial well-being.
If you’re considering a home equity finance option, make sure you understand the difference between a home equity loan and a line of credit.
Four things to do when considering a home improvement
- Get a financial review with your banker like Regions’ free Greenprint® plan.
- Determine the extent of your planned improvements along with a rough estimate of the total costs.
- Interview three or more builders/contractors to understand their level of experience and if it matches the home improvements you have planned. Then get rough cost estimates from each.
- Visit with an experienced home improvement lender several months before you start your project and before you’ve signed any contract with a builder/contractor. This is an important step to help you understand the various financing options and go through the qualification process. That way, you’ll know up front how much financing you’re eligible for and can budget accordingly.
