Eager to Improve This Spring?

CONSIDER CAREFULLY HOW YOU’LL FUND THOSE UPGRADES

ERIK J. MARTIN, CTW FEATURES

CTW PHOTOS

You’ve got big plans to upgrade your home this year. But those goals will likely come with big price tags. How can you swing these projects without breaking the bank?

Don’t be so quick to deplete your savings — instead, the experts recommend borrowing what you need after shopping around carefully for the best financing options.

First, realize that you’re far from alone in having eager home improvement ambitions. A recent report by LightStream reveals that three in four homeowners (73%) planned to spend money on home improvement projects — a 26% rise from a year earlier.

“Our survey also found that the average homeowner will spend about $9,000 on renovations, with 11% planning to spend $25,000 or more. That’s an 83% increase compared to our 2018 findings,” says Todd Nelson, senior vice president for LightStream.

While these trends are likely to continue in 2020, Nelson notes that homeowners must carefully plan their payment strategies.

“While using a portion of savings can be a smart solution, it’s also important to consider other funding options before dipping into money set aside for emergency funds or 401(k)s,” he says. David Bakke, a home improvement expert at Money Crashers in Atlanta, says there are benefits to financing remodeling projects.

“One is that you can get the project done without waiting to save up the cash. That can be particularly beneficial if the project is more of a priority need than a want. Another is that there could be a tax benefit involved, depending on the financing option you choose,” says Bakke. “The downsides are you have to qualify and apply for the financing and pay interest and possibly fees for the privilege of borrowing.”

Projects that add value to a home are particularly worth financing, per Eric Jeanette, president of Dream Home Financing and FHA Lenders.

“Examples are kitchens, bathrooms and home additions,” Jeanette says. “Ideally, you’d like to see your costs-paid returned eventually when you sell the home.”

Jeanette adds that the best candidates for financing are folks “with good credit, stable income and enough equity remaining in their home to support the additional debt.”

If you fit these criteria, consider one of the following financing choices: Home Equity Loan With this strategy, you tap into the equity built up in your home and get a lump sum single payment to fund your projects.

“This can be a good option if you have enough equity in your home to qualify. The interest rate is fixed. Also, the monthly payments will not change and are in place for a set period of time,” explains Daniel Cohen, managing editor for San Mateo, California-based Bills.com. “But you have to use your home as collateral, so if you can’t keep up with payments, you could face foreclosure.

“Additionally, if property values decline and you’ve tapped into too much equity in your home, you may put your home at risk if you need to sell or move,” Cohen says. Home Equity Line of Credit (HELOC)

A HELOC also enables you to borrow against your home’s equity, using your home as collateral. You can draw the money when you need it, up to a pre-approved spending ceiling, over a set draw period. Holden Lewis, a housing and mortgage expert at San Francisco-headquartered NerdWallet, says a HELOC “tends to give you the lowest rate among all the options.” Cash-out Refinance Refinancing your primary mortgage and tapping into your equity by taking cash out at closing could be another smart strategy.

“This could provide the lowest interest rate option, and you might end up with a lower monthly payment, depending on your interest rate. The interest may be tax-deductible, as well, and you won’t have an extra payment to make with another product since it’s rolled into your new mortgage,” says Bakke. “However, your closing costs could be high, and the process may take longer than other options.”

Additionally, “you might end up paying more total interest than if you had used a HELOC and paid off the balance in just a few years,” says Lewis. Personal Loan Pursuing a personal loan could be the right choice. This is an unsecured loan that doesn’t require using your home as collateral; you only need to qualify and apply your signature.

“The advantage here is flexibility. You can borrow money multiple times from an available maximum amount, and you pay interest compounded only on the amount you draw,” Cohen says. “Yet the interest rate is variable, so when rates rise, so does the payment. And restrictions may require you borrow a minimum amount each time.” “Rates on personal loans can vary a great deal; for someone with excellent credit, the annual rate could be 4% to 5%. Most have terms of 36 to 60 months with strict payment schedules to ensure that you pay off your debt in a timely manner,” notes Joe Toms, president of FreedomPlus in San Mateo. “The disadvantage is that you may be able to get a better interest rate with another option. And personal loans generally come with origination fees of 1% to 5% of the loan amount.” Credit Cards Lastly, you could charge your renovations on plastic.

“With credit cards, you might not even pay any interest at all if you do your research and find a card you can qualify for with a 0% introductory APR for the first year. Also, you have the potential to earn cash back, assuming you find the right card,” Bakke says. “On the other hand, if you carry a balance, the interest rate could be markedly higher than for other financing options.”

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