Tanisha A Sykes
Donald Olhausen Jr., a 34-year-old real estate agent in San Diego, completed a major renovation project for his 2,200-square-foot Mediterranean-style home in 2018.
“We completely renovated the kitchen and bathrooms, replaced carpets, modernized electrical and plumbing installations and did carpentry work inside and outside the house,” says Olhausen. “We also added lawns and new fences to the front yard to improve containment appeal.”
The project was quite an undertaking, but it more than paid off for Olhausen and his wife Gabrielle, 25. To pay for the renovation, Olhausen, who was the sole owner of the home at the time, borrowed $25,000 from his future father-in-law. Law.
“It was risky because I’d only known him for less than a year and he pushed for me,” he says. “It was definitely worth it, because the house looks beautiful.” Olhausen has since repaid his father-in-law in full.
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The professional home flipper chose not to refinance his home mortgage or get a home equity line of credit (HELOC) because he wanted to save on interest and avoid a higher monthly mortgage payment. He also didn’t want the loan on his credit report.
“Even if you don’t use all of the money from a HELOC, you still have access to it,” says Olhausen. “Therefore, credit bureaus show that you borrowed that money, which affects your debt-to-income ratio.”
In its 2021 US Houzz & Home study, Houzz found that home renovations increased 15% over the past year to a median of $15,000, with kitchens, outdoor spaces, and home offices receiving the most attention.
Before you get caught up in the fuss of choosing fixtures and paint colors, take the time to research your financing options. Here are five of the most common methods of paying for home renovations.
Cash
Paying in cash means you can afford your purchases without the hassle of paying off high-interest debt. If you have a large sum of cash in a savings account that pays little interest, you might want to consider putting it to better use. “Due to inflation and rising commodity prices, the purchasing power of a bank deposit continues to decline over time,” says Samuel Eberts, junior partner and financial advisor at Dugan Brown, a Dublin, Ohio-based firm specializing in federal pensions. He recommends saving at least six months on emergency expenses. “In addition, the money could be used for home renovations instead of sitting idle in the bank,” says Eberts.
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credit cards
Homeowner Olhausen also put $5,000 of his renovation costs on a credit card.
“That was my only option,” says Olhausen. “Normally I would advise against it because the interest will eat you alive.” Funding a home renovation project with a credit card is a double-edged sword, says Eberts. While many cards are interest-free for a period of time, Eberts advises paying off the debt before this introductory period is over. Otherwise, you will be charged the regular effective annual interest rate on the open balance.
home loan
A home equity loan, which is a type of loan you can use to borrow against the equity in your home, can be a smart move given the low interest rates in the market. As of early August 2021, the average interest rate on home equity loans was 5.35% APR, according to Bankrate.com.
“Mortgage rates are at record lows, so for a homeowner sitting on a pile of equity, cash is probably the lowest cost of borrowing,” said Greg McBride, chief financial analyst at Bankrate.com. “Many homeowners benefit from refinancing anyway, and withdrawing cash at this point could be the ticket to paying for major repairs or renovations.”
According to Bankrate.com, you typically need to have 15% to 20% equity in your home to qualify for this type of loan. Keep in mind that with a home equity loan, you’re taking on more debt and using your home as collateral. Eberts adds, “Basically, if you can’t afford the monthly payments, your home is at stake.” You’ll also have closing costs and fees to pay, so make sure you understand all of the requirements of the loan.
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HELOCs
A HELOC is a line of credit secured by your home that gives you a revolving line of credit for large remodeling projects. The HELOC offers a lot of flexibility in terms of how you borrow and repay the money, McBride says. If a project needs to be completed in phases, you can borrow the money as needed, “and only make interest payments when money is tight,” he says.
However, consumers should also be aware of the risks associated with this financial product.
Because HELOCS uses your property as collateral, there is a risk of foreclosure if you default on payments. In addition, these loans act as second mortgage payments; Therefore, you pay two mortgage payments each month. In addition, the interest rates on these loans are variable.”
“A cash-out refinance offers the security of a fixed interest rate and a monthly payment,” says McBride. “But a HELOC carries a variable interest rate that would increase with interest and enter a payback phase with higher monthly payments after 10 years.”
HUD Title I Loan
Title I loans are a good option for homeowners on modest income levels. For a single home, the maximum loan amount is $25,000 and varies for other types of homes per the requirements of the Department of Housing and Urban Development. “They’re not meant to do luxurious or fancy upgrades like installing a pool,” says Eberts. “HUD I Title Loans are intended to be used to make a home more livable.”
For example, some homeowners apply for these loans to improve a home’s accessibility for people with disabilities, which may include adding a ramp or widening doorways, Eberts explains.
These loans are issued by private lenders but are backed by the government. Most lenders require the borrower to use their home as collateral for loan amounts over $7,500. Visit Hud.gov for more information.
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