Financing a home improvement project is a big step. It means you are borrowing money to make your home a better place for one reason or another. Borrowing this money will cost you more than the amount of the repair by the time you count up interest and loan origination fees among other expenses.
So what do you need to know before you finance a home improvement project? Here are four common questions you should answer before you consider financing your home improvement project.
What Value Will This Add to My Home?
This is an important question, but the answer depends on the type of home improvement project you are talking about. Some projects are actually needs rather than wants and must be done in a timely manner. For instance, if you need a roof repair, a new water heater, or other vital appliances because one of them failed, the value the project adds is simply making your home function the way that it should.
However, things like adding a hot tub or a pool, putting an addition on the house, or adding to your garage space might be desirable, but they can’t really be classified as needs. The value they will add to your home depends largely on how long you intend to live there, how soon you might sell, and what other homes in your neighborhood have that are similar.
For instance, if you live in Arizona and four out of five homes in your neighborhood have pools and yours does not, putting one in may make your home more valuable on the market. You may simply be competing with the other homes in your neighborhood that are for sale.
The same tactic may not work for you in Idaho or other northern states. There, central air conditioning might set your home apart, but may actually be a luxury instead of a true value addition.
The value a particular project will add to your home is up to you to determine but ask around. Find out from a realtor or someone knowledgeable about the housing market what your home improvement will mean to your home, and factor that in to your decision about financing.
How Much Can I Afford to Borrow?
The rule is to never borrow more that you can afford to pay back and that is about more than just what your monthly payments will be. It is also about the overall cost of the loan. By the time you count origination fees and the APR of the loan compounded, you will get the overall cost of the loan. This should not exceed the equity you have in your home, or the value it will add to your home.
Of course, the monthly payments do matter as well. You need to be able to afford them, which means taking a realistic look at your monthly income and expenses. If you can’t afford the monthly payments, borrow less or choose other financing options that are more affordable. This brings you to the next question you should ask.
How Will I Finance my Project?
There are several ways to finance your project, from contractor financing to home equity loans or lines of credit. There are differences in these types of financing, from interest rates to how long you have to pay back loans, so which one you choose will vary greatly with your own situation.
For instance, if you have equity in your home and you are not planning to sell anytime soon, a home equity loan may be the best answer for you. Because it is secured by the value of your home, it will carry the lowest interest rates but it may take more time to get the money in your account.
Another secured option is a home equity line of credit. This gives you essentially a credit card with a limit of the amount of equity in your home or a percentage of it. Since this is actually a secured credit line, interest rates will again be lower, but you will only be charged interest on the amount of money you actually end up using.
If you are in need of an emergency repair, a personal loan or contractor financing might be the best answer for you. Although interest rates will be higher, the terms of the loan will probably be shorter, and contractors can get to work right away without a delay waiting for financing to go through.
You can also use credit cards, although this is probably the most expensive way to pay for home repairs unless you have a special low or no interest credit card, in which case it can be cost effective. Just be sure you can pay off the balance in the no interest period.
Is This the Right Time to Do This Project?
The last question regards timing. Is this the right time to do this project? Do you need it right now, or can it wait? This can also depend on season. For instance, you might not want to put in new carpet in the winter, when it is more likely the kids and pets will track in mud or dirt on it. The summer may be a better time for that project, when you can also more readily move and store furniture in the garage or other places.
Timing is about whether or not you can afford something, the season for landscaping projects and other outdoor improvements, and more. Weigh the timing before you start any home improvement project and finance it.
Home improvement projects are a big deal. They are a lot dependent on the value they add, how you can finance them, and the timing that will work best for each project.