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. Matt Gore, Regions Consumer Banking Manager, offers the following advice for home improvement payment options.
The most affordable way to pay for any project is with cash. Gore 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, Gore 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,” Gore 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: Gore considers this the most affordable option. These loans may provide the lowest interest rates, longer repayment terms which equate to low monthly payments, 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. But once you have established a line of credit, you’ll be able to access the money right away.
- 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.
- Credit cards: Credit cards can give you instant access to money which can be crucial in emergencies, but the interest rates may be higher than a home equity loan or line of credit. Depending on your situation and need, credit cards could be a good option for financing home improvements. Ideally, credit cards should be used at a level that can be paid off completely each month. Also, if your project costs end up extending beyond your credit limit, it may be too late to get a home equity loan to finish the project in a timely manner.
- Financing from the service-provider: While some service and product providers offer financing options, you may find the terms are not usually as good as they are with a home equity loan or line of credit.
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, Gore 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 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 experience financial strain month-in and month-out after all their bills are paid. Before embarking on any project, Gore 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 and the hope that you are 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.