Maybe you’re picturing that chef’s kitchen of your dreams. Or perhaps it’s time to repair the roof after the last big storm. Either way, you’ll need a plan to pay for it. You might be wondering: What financing options are available? What happens if I go over my budget?
Beverly Sweeney, consumer banking manager with SunTrust Bank, and John Snider, equity product manager with SunTrust Bank, answer these questions and more:
Q: What are some financing options people can use for home improvement projects?
John: There are a variety of home improvement lending options available. How quickly you’re able to access money is something important to consider, as well as the interest rates that will impact your payments, and if the loan or line is secured (requires collateral) or unsecured (doesn’t require collateral).
A home equity line of credit (HELOC) is one of the more flexible borrowing options because it allows you to borrow what you need when you need it. A HELOC offers a low interest rate and a longer repayment term, is secured by your home, and the process usually takes around 30 days from application to account opening. Once the line is opened, you can easily access funds as needed, up to your available credit limit, during the draw period (typically ten years).
A cash-out refinance is also secured by your home and allows you to refinance your mortgage for more than you owe, based on the home’s value, and take the difference in cash. The interest rate may be lower than those offered with other types of loans. However, because you are taking out a new mortgage on your home, the process can be lengthier, and you’ll need to budget for applicable closing costs and fees. At closing, you receive funds in a lump sum with a cash-out refinance.
Personal loans and personal lines of credit are also options. These can be secured or unsecured and can be one of the fastest ways to get your financing, which can make them ideal for emergency repairs, although they can be used for planned renovations, as well. The online application process takes about 15 minutes, and you are generally contacted within 24 hours if approved. With an unsecured loan or line, you may often access funds on the same day you’re approved A loan provides all the funds at once, while a line of credit allows you to access funds up to your available credit limit for a set period of time.
Q: What about using credit cards?
Beverly: Credit cards are easy and convenient, especially for smaller projects, like replacing a broken appliance such as a dishwasher. But if you’re looking at larger improvements or renovations, a home equity line of credit or a personal line of credit could be a better option with a potentially higher credit limit and lower interest rate than a credit card.
Q: What factors might make one type of financing preferable to another?
John: Speed is a big one. Say you realize you have a horrific roof issue and you want to get a repairperson out there as quickly as possible. You may get the work started before you know for sure how much it’s going to cost. Or say it’s the first hot day of the year and, of course, your air conditioner is broken. You don’t want to have to wait, so a personal loan or line of credit could provide the quick access to funds that you need.
Beverly: If you need the funds quickly, you’ll typically pay a higher interest rate on the funds you borrow. But if you plan ahead and have the time, then using your home as collateral and applying for a HELOC or a cash-out refinance could be the way to go. Keep in mind, too, that you may be able to deduct the interest paid on a HELOC or a cash-out refinance, and you’ll want to consult your tax advisor for more details.
Q: How can someone plan for wiggle room in their budget?
John: Your budget may change along the way with any renovation project. It’s typical for a major renovation to run 10 to 15 percent over budget, as plans change. If you’re using a HELOC, you may have more flexibility since you can draw funds as you need them. A personal line of credit is similarly flexible, as you’ll have the ability to access funds up to your available credit limit.
Beverly: It’s important to understand what your approved loan or line of credit amount is, as well as your options for accessing funds and repaying what you borrow. A line of credit offers flexibility to access more funds, as needed, giving you wiggle room. Just remember, as your outstanding balance increases, your minimum monthly payment will also increase.
Q: What else should people consider before taking on a home improvement project?
Beverly: Another important thing to consider is how the project will impact your home’s value. Think about your goals—do you want to recoup the costs, or is the project simply something you’ll truly enjoy?
John: Say you do a kitchen remodel. You maybe didn’t do it just for resale value—you did it because you’re a foodie, and you like to entertain, you like to cook, and you want a nice kitchen because you spend a lot of your time there.
Beverly: Exactly. So you need to think about both—how it could affect the home’s value, and if it’s something you’re going to enjoy.