The coronavirus pandemic has impacted how many Americans spend and invest their money, according to a survey of more than 2,000 consumers from Marcus by Goldman Sachs.
While the majority of respondents said they'll continue to spend the same, about 1 in 5 said they'll spend more post-pandemic. Of them, more than a quarter (27%) said they plan to spend more money on home renovations.
Home improvement projects can be seen as a long-term investment because they can increase the value of your home and make it more appealing to buyers. A recent study found that homeowners can gain up to $200,000 worth of value by renovating.
But home renovations can have a significant upfront cost — a major kitchen or bath remodel can on average cost around $75,000, according to a recent analysis from Remodeling Magazine. Some of the most valuable home renovations are basic replacements, such as a new garage door, windows or siding, the data showed. You can also add value by remodeling your kitchen and bathrooms, some of the most used rooms in your home.
Thankfully, you may be able to tap into your home's equity or even borrow a personal loan to finance home improvements.
Keep reading to learn more about the different types of home improvement loans. If you decide to borrow money to pay for home repairs or renovations, visit Credible to compare interest rates across multiple lenders at once without impacting your credit score.
3 ways to finance home improvement projects
Making upgrades to your home doesn't have to leave you with high-interest credit card debt. There are plenty of ways to pay for home improvement projects without breaking the bank, including:
Compare your options below to see which renovation loan is best for you.
1. Cash-out mortgage refinancing
Mortgage refinancing is when you take out a new mortgage with better repayment terms to replace your current mortgage. With mortgage rates hovering near record lows, it may be possible to lock in a much lower interest rate than what you're currently paying.
Cash-out refinancing is when you take out a larger mortgage to pay off your current home loan, accessing the difference in a lump sum of cash. For example, if you owe $180,000 on your existing mortgage, but your home is worth $350,000, you may be able to borrow a new mortgage worth $230,000 to access $50,000 worth of home equity to use for home renovations.
Here are a few things to know:
- Refinancing to a larger mortgage loan can add to the cost of interest over time. You may be able to recuperate the costs by securing a lower mortgage rate.
- If you refinance to a larger mortgage on a shorter repayment period, you can cut down on extra interest costs. However, your monthly mortgage payment will be higher.
- Mortgage refinancing comes with closing costs, which are between 2% and 5% of the total loan amount, according to Credible. Closing costs are generally included in the loan.
You can compare mortgage rates for a cash-out refinance on Credible to make sure you're getting the lowest rate possible for your situation.
2. Home equity loans and HELOCs
Another way to tap into your home's equity is to take out a home equity loan, also known as a second mortgage. Home equity loans offer a lump sum of cash at a low, fixed interest rate, using your home as collateral. The biggest risk of taking out a home equity loan is that you risk losing the roof over your head if you default on the loan.
You may also consider a home equity line of credit (HELOC), which is similar to a home equity loan but offers a different way of accessing cash. With a HELOC, you borrow money on an as-needed basis at a variable interest rate. That way, you're not accidentally overborrowing based on contractor estimates.
Like mortgage refinancing, home equity loans also come with closing costs. But as a bonus, the interest on a home equity loan or HELOC is tax-deductible as long as the funds are used to make renovations to your home.
3. Personal loans for home improvement
If you're searching for a way to finance home renovations without tapping into your home's equity or putting up collateral, you could consider an unsecured personal loan.
Personal loans offer fast, lump-sum funding with a fixed interest rate and monthly payment. You may be able to access the funds the next business day after lender approval, which means you can get started on your home improvements right away. In contrast, home equity loans and mortgage refinancing may take weeks to process.
Compared with secured forms of financing, though, personal loans come with relatively high interest rates — especially for borrowers with a low credit score — as well as origination fees. But if you have good credit, you may qualify for a competitive offer when borrowing money for your home remodel. Plus, select personal loan lenders offer an autopay discount.
Since personal loan interest rates vary depending on a number of factors, including a borrower's creditworthiness, it's important to shop around with multiple online lenders to avoid higher interest rates. You can compare personal loan rates for free on Credible to make sure you're getting a low interest rate.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at firstname.lastname@example.org and your question might be answered by Credible in our Money Expert column.