Financing your Home Renovations
Giving your home a makeover is not only a personally satisfying endeavour, as you set out to customise your ideal home. It can also be a sound financial investment.
Credit cardThere are advantages and disadvantages to financing home improvements with plastic. On the one hand, it’s a convenient way to buy what you need at stores and keep track of your spending, and you can pay back as much or as little as you’re able to each month. On the other hand, the interest rates are usually higher than with other types of loans. What’s more, there will always be the temptation to overspend on your home improvements. This probably isn’t your best option.
Home equity loanA home equity loan is sometimes known as a second mortgage. This is generally a fixed-rate, fixed-term loan you take out against your property. The loan isn’t based on the market value of your loan, but its equity. In other words, the amount that you’ve already paid into your property. Home equity loans are often used to finance home improvement projects, and what’s great is that they usually have low interest rates. However, just remember that your home will be used as collateral, so you need to be very sure about your repayment ability.
Home equity line of creditA home equity line of credit (HELOC) is similar to a home equity loan in that you lend against the built up equity. But instead of borrowing a single lump sum, you can access money as you need it, similarly to that of a credit card. Although your interest rates will probably be a lot less. In other words, you can take out money as you need it for your renovations.
As with the home equity loan, the downside is that your property is set up as collateral. So only use a HELOC if you’re confident on your ability to pay the loan back. Another disadvantage is the same one that comes with credit cards – the temptation to overspend might be too difficult for some homeowners to avoid.
Personal loanA potential disadvantage with a home equity loan or line of credit is that, particularly if you’re a new homeowner, you may not have yet built up that much equity into your property. Simply put, home equity is the market value of your home, minus what you still owe on it. So if you aren’t well into your home loan repayment term, the equity might not be enough to qualify for a sufficient loan. In that case a personal loan might be more a suitable option if you have a lot of renovations to do. The interest rate of a personal loan is generally still less than that of a credit card.