Home improvement projects have a way of increasing in priority when you’re always in the house.
The leaky kitchen faucet never really bothered you until you had to turn your kitchen table into a desk, forcing you to listen to the dribble. All. Day. Long.
Or maybe you discovered your cozy home isn’t quite big enough to also house an office, gym and school, so you need to rethink your space.
Whatever the reason and whatever the size of the project, you need to make a change — but how are you going to pay for it?
Considering the eye-popping price tag — the average cost for just a garage door replacement is $3,695 and a minor kitchen remodel surpasses $23,000 — you might not know where to start for financing your home improvement projects.
But whether the price tag is a few hundred dollars or into the triple digits, we’re here to help you decide the best way to finance your project — without winding up in debt long after the last coat of paint has dried.
7 Ways to Finance Home Improvements
Listening to financial experts talk about how to pay for your home improvement is a good idea, but what do they know about the real-life leaking roof you’re living with?
Well, Jill Emanuel is the lead financial coach at Fiscal Fitness Phoenix. She works with plenty of clients as they choose financing for their home renovations.
But she’s also a homeowner who needed to replace her entire air-conditioning system and ductwork this past spring — and in Arizona, air conditioning is not optional.
She spoke with us about how to decide which options are best for a home renovation — as well as her personal experience financing her own project.
Wait, Should You Even Be Doing This Project?
First thing’s first: What’s your reason for doing this home project?
Is the repair necessary (like replacing a dead refrigerator) or a nice-to-have (like adding a backsplash)? “Or is it that they’re just bored right now and staring at the thing that doesn’t look the way that they want it?” Emanuel asked.
Doing this assessment can help you prioritize projects. Here’s what else to consider before you start a project.
Many home-improvement retailers offer free classes that can help you save on at least part of a project by teaching you how to do smaller projects, like patching and painting plaster.
By creating a home improvement budget before you start anything, you can avoid letting projects grow out of control, both physically and fiscally.
Do Your Research
If you have the money already on hand for a smaller project — replacing a faucet, for instance — the research process may only take a few days as you compare prices and ask your plumber for an estimate if you don’t want to do it yourself.
For larger projects — like renovating a bathroom — doing the research could take months. Emanuel recommended checking out home-improvement blogs and podcasts, watching YouTube tutorials and getting recommendations from family and friends as part of the process.
When you’re ready to get an estimate, request quotes from at least three sources. When Emanuel was ready to replace her air-conditioning system and ductwork, she said she ended up getting five estimates.
“The first three that we got were all over the place — the lowest was around $14,000 and the highest was around $30,000,” she said. “And they were all recommending different things.”
Before you invite anyone out for an estimate, decide ahead of time that you aren’t going to sign anything that day. It’s the job of the salesperson to try to close the deal on the spot, but when you’re considering projects that can climb into the thousands of dollars, it’s not the time for a rushed decision.
If a salesperson pressures you to sign — saying the deal they’re offering is only good for today, for instance — stand firm. There’s a good chance you can ask for the same “deal” if you call them back a few weeks later (especially if it’s at the end of the month when they need to meet their sales quotas).
After the initial research phase, it’s time to think about financing your project. Here are seven to consider, including the pros and cons of each.
1. Pay Cash
If you have the cash to spend on a project, this one probably seems like an easy choice.
But how much should you shell out for a renovation — and when should you hang onto the cash instead?
Right now, most financial advisers say hold onto your cash, given the current economic uncertainty.
If you do use cash, ideally, you should put off the project until you can pay for it in full — you can often get a discount from a contractor by paying for the project in cash.
That’s Emanuel’s advice to her clients, but she noted that she found out firsthand that sometimes a project can’t be put off until you’re financially prepared.
“We could have waited until we had all the money to pay cash for [the air conditioner],” she said. “But that would likely be a year down the road, and when we had inspections done on our AC, they said it probably won’t make it through the summer.”
2. Dip Into Your Savings
Gathering the cash for a specific project is ideal, but what about dipping into your savings?
Again, in an ideal world, you should have a specific savings account for the inevitable home repairs and projects.
“If we can be in the habit of putting even a couple hundred dollars in the savings every single month, label that account for home repairs and projects,” Emanuel said.
Financial experts recommend that you set aside 1% to 3% of your home’s value every year for home maintenance. So for a $250,000 home, you should save at least $2,500 every year.
But what if you haven’t set up a separate account and all of your savings is piled into one account?
You’ll have to figure how much you need to set aside for an emergency fund. The general rule of thumb touted by many personal finance professionals is to have between three to six months’ worth of living expenses stored up in your emergency fund.
Once you figure out the amount that you feel comfortable with for an emergency fund and have accounted for other savings goals, you can consider using the remaining funds in the account for your home improvement project.
Emanuel noted that some home projects might be considered emergencies — like, say, not having air conditioning in Arizona in June.
Her family considered tapping their emergency savings for the project, “but we didn’t love the idea of draining that much money from our savings, which I think is very true for most people right now.”
3. Apply for a HELOC
And if you’re like a growing number of Americans, you may have built up a sizable nest egg in your home. Home equity has climbed from $7 trillion in 2011 to $15.5 trillion in 2018, according to Harvard’s Joint Center for Housing Studies.
So which form of financing should you choose?
A HELOC is more like applying for a credit card — you’ll receive a line of credit that you can use at your discretion.
If your project is an ongoing one — or you want to pay for it in phases — a HELOC may be the better choice, according to Emanuel.
“Maybe they want to be able to pull out $5,000, get some of the work done and pay down some of the balance,” she said. “Then they go to the next part — they pull out $10,000.
“Or there are multiple contractors that they’re going to have to access the line of credit for at different periods of time. It can work pretty well for that.”
You can typically get a much better interest rate on equity lines of credit compared to credit cards, but they’re adjustable rates — which means your interest rate could increase suddenly.
But beware of what you’re signing up for, Emanuel warned. An interest-only HELOC could offer an enticing monthly payment during the draw period — that’s when you can withdraw funds and make interest-only payments.
Terms vary by lender and loan, but the typical draw period is 10 years, with the repayment period lasting 15 to 20 years.
But you won’t make any progress paying off the original balance until the repayment period, which could be years after you’ve completed your home improvement project.
“It looks really great when you’re thinking gosh we have this big project and we don’t have a lot of cash on hand,” Emanuel said. “But the balance never goes down.”
4. Use a Home Equity Loan
Another choice for tapping the money you have invested in your home is a home equity loan, also known as a second mortgage.
For home equity loans, the lender gives you your money all at once, and you repay it at a fixed interest rate over a set period of time.
For any loan that uses your home equity as collateral, be aware that the lender can potentially take your house if you default on the loan.
If you get a quote for a home improvement project that you want to accept and pay for up front, a home equity loan could be the way to get a large lump sum at once.
But be careful — if you end up depositing the money into a general savings account, your loan could trickle away quickly if you dip into the funds to pay other expenses like credit card debt or personal expenses.
Emanuel said she and her family weighed the pros and cons of a HELOC and home equity loan, but weren’t fans of the interest rates they’d be tying themselves to for years.
5. Use Cash-out Refinancing
In a cash-out refinance, you’re replacing your existing mortgage with a new one for a larger amount. You can withdraw the difference between your new mortgage and the old one — lenders typically limit the loan amount to 80% of your home’s value.
If you can snag a substantially lower interest rate than your current mortgage rate, the savings could potentially allow you to get the money you need for the renovation, enjoy lower monthly payments and still be on track to pay off your mortgage in the same timeframe as your old mortgage.
But you’ll need to factor in all the fees associated with refinancing — like closing costs, appraisals and title searches — before deciding if you’ll save on this option.
The option is best for those who want to stay in their home for several years to recoup the costs.
And you’ll need the discipline to spend the money on only a project that adds value to your home — think completely renovating a kitchen or adding square footage to the home — to make a cash-out option worth tapping the equity in your home.
6. Apply for a Home Improvement Personal Loan
Personal loans — marketed as “home improvement personal loans” — are another loan option to consider.
The good news is that it’s typically a lot easier and faster to get a personal loan compared to a home equity loan — there’s a lot less paperwork involved because it’s an unsecured loan. If you apply for an online personal loan, you could potentially be approved and have the money in your account in less than a week.
But to qualify for the low interest rates that online banks advertise, you’ll need a credit score of 600 or better. And you may not be able to borrow nearly as much with a personal loan compared to home-equity lending options if you have substantial equity in your home.
If you have less than stellar credit, you could be facing double-digit interest rates on the loan, so read the terms and conditions carefully before you sign.
7. Accept a 0% Financing Offer
So what did Emanuel end up choosing to finance her air-conditioner replacement project?
“The last option was that we could get financing through the company that was going to install the AC units,” she said, adding that big-box retailers like Lowe’s and Home Depot often run specials for similar offers for financing projects.
“They had a partnership with Wells Fargo that was doing 18 months of 0% financing for home improvements. Ultimately, that’s the route we took.”
And while her family is enjoying their air-conditioned comfort without paying any interest until 2021, she warned that this is not the best option for everyone.
That’s because the 0% financing offers aren’t actually interest free — they’re interest deferred, meaning you’re still accruing the interest. But that interest will be waived so long as you pay the full amount by the introductory period’s deadline.
Zero-interest credit card offers are another financing option — you can use the card like a HELOC. But pay off the balance by the end of the introductory period or face sky-high interest rates.
“That’s where really people can get into a lot of trouble — they feel very optimistic going into the project,” she said. “They’re thinking: We have all the time in the world, we’ll be able to get it paid off — they look at the minimum payment, and they feel like this is something they can afford.”
But if you lose your job, a financial emergency arises or you simply don’t pay off the amount aggressively enough, you’ll be facing a hefty new balance when the deadline arrives.
“A personal loan would have been better, even if it was a 10% loan,” she said. “They still would have come out ahead than having all that back interest applied at the end.”
How much extra could it potentially cost? Emanuel checked her own statement after four months into her 0% interest introductory period.
“In just those four months, $1,500 worth of interest has already accrued,” she said. “If we were not to get it all paid off within those 18 months, we would have over $3,000 worth of interest.”
She considers the statement just another reminder to pay off the balance well before her introductory offer ends.
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.
This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.
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