Finance Options for your Home Improvement Project
Of course you can always pay cash, and that is your cheapest option. However, most people don't have the spare cash for a large project. Most people finance remodelling projects by borrowing against the equity in their home.
There is more than one way to finance a project. We review the most common options below.
Refinance your First Mortgage
If you are like most people, you have a first mortgage on your home. Under some circumstances, refinancing your first mortgage and taking out additional cash to pay for home improvements may be a very good option. For instance, if current mortgage rates are lower than your existing mortgage rate, refinancing will save you money on your current mortgage balance. Plus, this will likely be a lower rate for the additional money you take out compared to other financing options.
If current mortgage rates are higher than your existing mortgage rate, then you probably leave your first mortgage alone and choose a different option.
Another benefit of using this method is that for many people the interest expense may be deductible.
Take Out a Second (or Third) Mortgage
If you choose not to add on to your 1st mortgage balance then taking out (or refinancing) a 2nd mortgage may be a good option. Generally, 2nd mortgage interest rates are higher than first mortgage rates, but some exceptions may exist, especially for shorter loan terms.
Taking a second mortgage means that you have two mortgages and two mortgage payments. Like a first mortgage, interest paid on the loan may be deductible from your income taxes.
Obtain a Home Equity Line of Credit
This is actually a type of second mortgage too. Although it is unique in that you can borrow money as needed by writing checks against your credit limit. This is a popular financing option because you don't borrow money (and thus owe interest) until you need it. So as payments come due on the remodel work, you simply write a check from your home equity account.
Another benefit is that you can apply for a limit that is greater than the anticipated cost of your project. If your projects go over your projections, you have additional funds available to pay for ht e work. Also, in many cases, the interest on this type of loan, when used for home improvement, is deductible.
Take an Unsecured Loan
You may borrow money on an unsecured loan, or you may use something of value, such as a car, as security. This type of loan is faster to apply for and get funded, although the cost is usually higher and the interest is not deductible.
Take Advantage of your Contractor's Financing
In some cases the contractor may offer to finance the project. This is most common with a large company or a company that provides specialty products like swimming pools. While this may be a favorable arrangement, carefully review the terms to make certain the cost is reasonable and competitive with financing you could obtain from other lenders,
This not the same thing as a contractor who suggests a particular lender for you to use. There have many scams run against unsuspecting homeowners by unethical builders and lenders. While your contractor may suggest a reputable lender, take special care to make sure the documents you sign are complete and reflect the costs that you expect and that those costs are reasonable and competitive.
Pay with a Credit Card
This is likely to be your most expensive option. Furthermore, the interest is unlikely to be deductible. This option should be used for only a very small project. If you do use a credit card, we recommend making payments that exceed the minimum payment otherwise you may pay substantially more in interest than the original cost of the project.