Is it unwise to use loans for home improvement?

Written by Bryan Clayton on December 06, 2016

Is it unwise to use loans for home improvement?

Whether homeowners hire a professional or perform the work themselves, home improvement projects are never cheap. From installing a beautiful new pool or redesigning landscaping, these projects can run into the thousands of dollars; therefore, most homeowners must rely on a loan to pay for the project. However, depending on the work wanted or needed, home improvement projects can often add value to the home.

As with most financial decisions, it is best to know the options of loan choices and what effect they may have on the property or on the individual. So if one is contemplating an addition to a property or a remodel of some sort, it is best to take a look at the best possible financial options to garner the correct monetary pathway for the project.

Utilize Cash If Possible—Although not technically a “loan,” cash is king and more desirable than accumulating debt. However, since the average bathroom remodel can cost over $15,000, one would have to save for many years to have enough money for such an upgrade. For smaller projects like landscaping in Hendersonville, Tennessee, cash may be the best option and could also be used as a negotiating tool to obtain a discounted price. Going the cash route, no interest charges or fees will ever loom over the homeowners head, and there are no risks associated with losing the home.

Get Home Equity Line of Credit—Home equity lines of credit, or HELOC’s, are a revolving type of loan. Similar to a credit card, they allow a homeowner to borrow money periodically over a set amount of time, usually between 5-10 years, and only pay interest on the borrowed amount. HELOC loans are best suited for homeowners that tackle smaller projects, like replacing an Air conditioning unit or painting the exterior of the home, between the $5,000-$15,000 range. Since HELOCs are adjustable rate mortgages with fluctuating interest rates, closing costs or application fees are normally not attached. However, defaulting on this type of loan can put the home at risk if the debt is not serviced.

Explore a Personal Loan—Personal loans could be a good fit for projects between $15,000-$50,000, like fixing a roof or remodeling a kitchen. According to Credit Karma, these loans are very easy to apply for and do not require the homeowner to use the home as collateral. Interest rates do tend to be higher on a personal loan, but most do not require closing costs or processing fees. The duration of this loan can be more flexible then the other types and tends to extend anywhere from 5-10 years. In a worst case scenario, only the personal credit of the borrower would be affected, and the home would not be compromised if the loan went into default.

Obtain Home Equity Loan—Home equity loans are the most popular when it comes to home improvement. Banks will only loan to homeowners who have equity established in the property and typically only allow loans up to 85% of that equity. This type of loan normally last around 15 years and is best utilized when one is considering a project larger than $50,000, For example, installing a pool or adding a bonus room. Historically, home equity loans carry lower interest rates but with low interest rates come hefty closing costs and expensive application fees. Additionally, if a homeowner defaults on this type of loan, he or she risks losing the home.

Seek contractor in-house financing—Many contractors will offer in-house financing options, or payment plans as a means to earn new business. Several lawn care companies in Alpharetta, Georgia, offer payment plans for any exterior landscape home improvement projects over $5000 spread over six months interest free. This creates a win-win scenario for homeowners and contractors. Creative, direct financing options like this are wonderful ways to complete larger projects done without having to go into debt or putting any home at risk.

Whatever home improvements are desired or warranted, knowing these tips may save a little time, money, and even a home. It is best to do the research on interest rates, what other out-of-pocket expenses can occur, and duration of loan when deciding on what path to take. Since the types of financing for home improvement vary, individuals must take into account their own personal situation—available income, other upcoming expenses, etc. So the answer to “Is it unwise to use loans for home improvement,” can be answered by following these tips; this way the homeowner will ensure that one is making the right decision when it comes to financing home improvement projects and enjoying their newly renovated home.