Finance Options for Home Renovations

There are many reasons you might want to renovate your home. Besides the added value to the property, renovations may be required to fix safety issues, and give additional comfort and space for better living situations.

Any successful home renovation project starts with a well-thought plan. The plan includes cost as the key part, which is how much and how you are going to pay for it.

Home Renovation Costs

Here are the costs associated with home renovation:

Cost of Landscaping

On average, landscaping service costs $5 to $15 per square foot, for basic and intermediate services. A full compound makeover involving landscaping, remodeling, and design can cost up to $50 per square foot. Basic landscaping service includes lawn irrigation, planting grass and flowers, and lawn thatching, among others.

Cost of Septic Pumping

Typically, septic tanks and cesspool pumping cost between $0.23 and $0.40 per gallon.

H3: Cost of Repaving Driveway

According to Thumbtack, it will cost you an average of $3 to $5 per square foot to repave your driveway. You need an asphalt company for professional repaving.

Cost of AC

Common AC repairs involve cleaning or replacing air filters, thermostats, defrost control, condensation drain, condenser fan replacement, and compressor repairs.

Cost of Roof Repair

Common roof repairs include fixing improperly installed flashing, replacing tile or shingle replacement, gutter repair, ponding water, fixing leaks, poor ventilation fixing, and metal roofs repair.

Cost of Heating Repair

Heating services include cleaning ducts, filters, condensers, vents, and evaporators.

Cost of Gutters

Gutter repair activities involve fixing faulty gutters, cleaning the gutters, and sealing leaky parts. Professionals recommend aluminum gutters for durability, style, and price.

Cost of Plumbing

24 hour plumbing service includes the cost of materials like pipes and taps plus the cost of labor. Plumbing costs may vary depending on factors like the type of pipes used.

Cost of Window Cleaning

Window cleaning is necessary to boost the window’s usability and durability. You’ll need commercial window cleaning services for better results.

On average, renovating an entire home will cost between $15 to $90 per square foot. The bigger the home renovation project, the more you pay.

Finance Options For Home Renovations

There are various finance options for home renovations, including options that use the equity you have built up in your home and non-equity options like credit cards and personal loans.

Here are common finance options for home renovations:

Personal Loan

Personal loans are the most common finance options for home renovation projects. Personal loans can be used to pay for anything, although home improvements and debt consolidation are the two most common uses.

Also, personal loans are easily available. You can easily get a loan from a range of online and traditional lenders, so it is easy to check your loan eligibility and compare and choose the most favorable loan terms.

Pros of Personal Loan

No collateral requirement – A personal loan is an unsecured debt, meaning it’s not tied to any collateral. In that case, if you fail to repay your loan, creditors cannot take your property or other collateral. That said, creditors can ruin your credit score and find other paths to recover their money.

Fast Approval – Generally, personal loans have fast approval and payment rates, making them best for emergencies. They are relatively simple compared to other finance options for home renovations. You can get the money quite fast, sometimes within one business day.

One lump sum – A personal loan is paid all at once, making it easier to make a huge purchase, consolidate debt, or use it all at once. Also, you will get a fixed interest rate and a certain monthly payment, making it easier to manage the loan.

Cons of Personal Loans

High-Interest rates – Personal loans attract very high-interest rates compared to other finance options for home renovations. Because these types of loans are collateral free, they are very risky for lenders. For this reason, lenders pass the risk onto you through high interest. Sometimes the interest rate may be higher than credit cards or collateral for a secured loan.

More eligibility requirements – Personal loans have strict requirements compared to other finance options for home renovations. If you have a short financial history or a poor credit score, fewer lenders will be willing to loan you. Furthermore, most personal loan lenders won’t allow cosigners, who can help strengthen your approval odds.

High Processing Fees – Personal loans attract fees and penalties that may push up the cost of borrowing. Most loans come with an origination fee of up to 5 percent of the loan amount. The loan processing fee can either be subtracted from the amount disbursed or rolled into the loan.

Home Equity Loans

A home equity loan is another common among the finance options for home renovations. A home equity loan is a secured loan that allows you to use the equity you have built in your property as collateral to borrow money.

Your property is thus used as security for the loan. So, if you default, your lender can legally take your house away from you. This guarantee makes equity loans safer for lenders and is often cheaper for the borrower.

According to the Federal Trade Commission, you can borrow up to 85% of your home equity. For instance, say you have $100,000 of home equity, which means you can borrow up to $85,000. Therefore, if you don’t have much home equity, you might not be able to borrow much.

A home equity loan is often referred to as a second mortgage, given you have another loan to pay in addition to your primary mortgage.

Home Equity Loan Eligibility Requirements

Here are some general requirements for home equity loan eligibility:

  • Equity In The Home – Your house should have equity of at least 20%.
  • Good Credit Score – A score of about 650 and above should work.
  • Low Debt-To-Income (DTI) Ratio. Typically, a DTI ratio of 44% to 50% is fine for most lenders.
  • Sufficient Income. Your income should show your ability to repay the loan.

Pros of Home Equity Loan

Fixed interest rate – Home equity loans have fixed interest rates. Even if rates move up in the market, you’ll never pay more. With a home equity loan, you’ll know exactly how much you will have to pay back right from the start.

Being able to predict the total amount makes it easy for you to plan, and ensure you will be able to make the payments for the entire time of the loan.

Lower interest rates: The interest rates for almost every type of loan have been going up recently. Luckily, home equity loans are secured loans giving your lender more sense of protection and the privilege to attach lower interest rates to your loan.

If you take a home equity loan to finance home renovations, the interest you pay on that loan could be tax deductible. Your accountant can estimate how much tax will be deducted with regard to your personal financial situation.

If you, however, use your home equity loan, to pay for a child’s school tuition or pay off a high-interest-rate credit card debt, you cannot deduct the interest on the loan.

Long Payback Period – You also have the freedom to choose a loan term with a home equity loan. You may choose a short-term loan, like 5 years if you desire to repay the loan faster and spend less interest. Or you might want to stretch out the loan term, say to 15 years if you desire a smaller monthly payment. Please note that the shorter your loan term, the less you will pay in interest.

Cons of a Home Equity Loan

Loan Is Secured By Your House: Your home is the collateral for the secured home equity loan. If you fail to pay your loan on time, then your lender can confiscate and probably take your home. That fact makes home equity loans riskier than personal loans or credit card debts, none of which requires any collateral.

The potential to overspend – A home equity loan considers your current property value. If the market crashes, however, or your area becomes less enviable, its value could go down. If your property value declines, you’ll owe more on your property than it’s worth. In return, this makes it hard to sell the property.

Costlier application process – a home equity loan isn’t as easy and quick to apply for a new credit card holder. The application process usually might take weeks, or even months, as the lender reviews your credit history and eligibility.

Home Equity Line of Credit

A home equity line of credit (HELOC) is one of the common and great finance options for home renovations. Like home equity loans, HELOCs are secured loans with your home as collateral.

A HELOC is a rotating credit line that allows you to take out funds against the credit line for up to a current limit, pay the money, then take it out again.

A HELOC is a sort of merger between a credit card and a home equity loan. It gives borrowers access to a certain amount of funds on an “as-needed” basis, meaning the payments may change as you borrow.

That also means you don’t pay to borrow funds you don’t need yet. This can come in handy if you are going about home renovations gradually over a period of time.

The application process for HELOCs is almost similar to that of a home equity loan. The Lender strives to evaluate the market value of your property and take a thorough review of your financial history to ascertain whether you are qualified to sign up for a new line of credit.

HELOC Requirements

As with home equity loans, the following factors are important to the lenders of HELOCs:

Home equity – The total amount of funds you can borrow in a HELOC will depend on how much equity you have built over time.

Debt-to-income (DTI) ratio: The lender will review your income and the amount of debt you are already balancing. They may ask you to submit proof of employment and other income statements for their review.

Credit history – Your credit history also plays an important role in the funds’ approval process. A credit history helps the lender determine your experience borrowing funds and paying them off. A lender might deny your application based on information in your credit reports.

Pros of Home Equity Line of Credit

Pay what you spend – With HELOCs, you will only have to pay for funds you spend, plus interest. This is unlike other finance options for home renovations, like a home equity loan, where you’d have to pay back the full loan amount whether you used it or not.

High loan limits: HELOCs can offer access to very huge sums of money if you have high equity in your home.

Flexible repayment terms – The lifespan of your HELOC may vary depending on how much funds you borrow and your lender. Typically, HELOCs can go for up to 25+ years.

Cons of Home Equity Line of Credit

Home as collateral – HELOCs are secured loans with your home as collateral. While this will help you get a lower interest rate, you are taking a risk of losing your home in case of a loan default.

Variable interest rate – Unlike a home equity loan that offers a fixed interest rate, a HELOC comes with variable rates. In other words, your interest rate can go up based on the Federal Reserve’s decisions.

Which Loan Should You Choose?

Choosing between different finance options for home renovations can be a rigorous task. While all of the above options can help you upgrade your home, they aren’t interchangeable.

Generally, go for a personal loan if you want a quick, easy-to-get loan. You’ll have to pay more for this type of loan.

Go for a home equity loan if you want to borrow a lump sum for a home renovation project, and you have enough equity built into your home.

A HELOC is the path to go if you don’t need all of the cash in a lump sum. If you are doing your project gradually, a HELOC will allow you to use money as you need it. You will only pay the money you use plus interest.

Finally, don’t forget to consult a financial advisor if you get stuck, especially if you’re planning to undertake a costly home renovation project.

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