Ways to Fund Home Improvement
This is obviously the easiest and best way to cover the costs of home improvements. You won't have future payments and you won't encumber the equity on your home. "It's always more financially sensible to wait until you can pay cash," Fleming says. For many people, that means doing one small project at a time. Take on safety improvements first, but otherwise prioritize what you feel is most important and can afford.
Refinance Your Mortgage
This is the best option for homeowners who would benefit from refinancing anyway, perhaps with a lower interest rate, as long as they don't spread the cost of the improvements over more years than the renovation.
Home Equity Line of Credit
If you already have a good first mortgage, a home equity line of credit can be a good option. With these loans, you draw out money as you need it and pay it back at your own speed, as long as you make at least minimum monthly payments
Home Equity Loan
With a home equity loan, you borrow a fixed amount and pay a fixed payment over a certain amount of time. A 15-year term is typical, but with some lenders you can go as short as five years and as long as 30 years. "A home equity loan is the best option only if you're allergic to adjustable rates," Fleming says. "It's still cheaper than a construction loan." Bankrate.com's average was 5.22 percent for a fixed-rate home equity loan.
A construction loan is used to build a house or make major renovations. It might be worth considering if, for example, you are building a major addition that will cost more than the equity you have in your home. Those loans are not always easy to find, and they come with a lot of requirements. Generally, a construction loan is a short-term loan, and you refinance into a traditional mortgage loan once the home or renovation is complete. "They're very cumbersome because they have to be managed. The money is not released until various stages of the work are done," Fleming says
might be able to cover a smaller renovation on your credit cards, or at least use them for the materials, though most cards charge a fee for cash advances.
Borrow from Your 401(k)
Borrow from your 401(k) Most 401(k) programs allow you to borrow from your account and pay back the loan over five years, usually via payroll deduction. You pay interest to yourself, though that may not be as much as you would have earned if you had left the money invested. However, if you leave your job, the balance will be due immediately.
Federal Housing Administration 203k Loan
These loans are typically used to buy a house that requires a lot of repairs. But they can also be used for refinancing, and the requirements are similar to those of other FHA loans. A downside is that you will have to carry mortgage insurance for the life of the loan. There is also a Streamlined 203k program available that will lend up to $35,000 for less complicated repairs.
FHA Title 1 Loan
These loans of up to $25,000 for home improvements are insured by the federal government and are available from approved lenders at market interest rates. Terms can be up to 20 years, and the homeowner does not have to have equity in the home.
If you are 62 or older, you can get a reverse mortgage based on a percentage of the equity that you have in your home. These loans are more expensive than refinancing or home equity loans, but you aren't required to pay them back until the home is sold or you move.