The best financing method for your home improvement method is one that gives you the most return on investment. To get the best ROI, you need to not only get the best financing method but also calculate the amount that you need to invest in the remodel so that you do not go overboard with the improvements. Here are some of the best ways to finance home improvement projects.
1. Savings
Saving money takes time. However, the advantage is that you will have no interest to pay back after the home improvement project. You also do not have to deal with paperwork from lenders. Before you tap into your savings, you need to be sure that the home improvement project will give you a return on investment. For projects that give high ROI, you can use savings and then bank on the growth in value that you witness after the project.
You can take a loan with interest rates as low as 3%. In such cases, it might be ideal for you to invest your savings and take a loan to finance the home improvements.
2. Construction Loans
You can go for a Federal Housing Administration 203(k) for the home renovation project. A loan of this kind is offered based on the estimated future value of a home that comes with the improvement. The loan is not simple and there are so many terms to meet. Even worse, the loan can be expensive. If you qualify for the loan, the money will be released to the contractor in stages based on the progress of the home improvements.
Construction loans come with private mortgage insurance. During the project, there are several ongoing evaluations and appraisals before the money is released for the next phase of a project.
3. Personal Loan
Personal loans are for homeowners who need a small amount of money. These loans have less upfront cost, and you will pay them back quickly compared to other loan options. You will have about six years to repay the loan. The rates charged for these loans are higher than that of HELOC and mortgages, but you will pay less than what you would with credit cards.
According to Cenvar, a Virginia roofing company, “many quick and simple home improvement loans available come with high, even predatory, interest rates.” As such, you need to compare lenders to ensure that you have the best rates and you go through a hassle-free process.
4. Cash-Out Refinance
Mortgage rates keep going down. Whether you are renovating or building a new home, you will enjoy these low rates. With cash-out refinance, you replace your existing mortgage with a new one, which will come at a lower interest rate. You can take a larger amount with cash-out refinance, but because of the lower interest rates, you will still end up paying a lower amount compared to what you would have paid with the initial loan.
With a cash-out refinance, the money comes to you and not to the contractor. This way, you have flexibility with your home improvement project.
5. Home Equity Line of Credit, HELOC
If you have enough equity in your home, HELOC is an option for you. You will pay low closing costs and payments and your initial payments will be interest-only. One advantage of HELOC is that homeowners can take tax deductions for the interest they pay. However, one needs to read through the blueprint for HELOC before they sign up.
Understand that the minimum payment for HELOC will only cover interest before you sign up for the line of credit. You will need to pay both the principal and interest amount within the stipulated five-year timeframe.
6. Calculate Estimated ROI in Comparison to the Cost of the Project
Before you take out a loan or withdraw your savings, you need to ensure that the project will pay you back. For instance, a kitchen remodel should not take more than 10% of the value of a home, while a bathroom remodel should be about 5% of the home’s value.
Estimate the cost of your home, the cost of the project, check your credit score, and then compare loans from different lenders. If you have low credit, take your time choosing lenders as some can offer loans at very high-interest rates.
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