Home improvements can be expensive, but there are ways to pay for them without dipping into your savings and needing to get an emergency personal loan should something happen.
There are many different options for covering your home improvement costs; here are some of the most popular options.
Alternative Ways to Pay for Home Improvements besides your savings:
- Home Equity Loan: A home equity loan is a loan that you take out against the value of your home, which you use to pay for home improvements or other financial needs. You typically need to have at least 10% equity in your home to qualify for a home equity loan, and the loan amount will depend on your credit score and the size of the loan.
- HELOC: A HELOC is a home equity line of credit. This type of loan is typically used to cover short-term financial needs, such as unexpected expenses associated with a home purchase or repairs. You can use a HELOC to borrow up to 85% of the value of your home, which means you will need to have at least 5% equity in your home to qualify.
- Personal Loan: A personal loan is a loan you take out from a bank, credit union, or other lender. You will need good credit and an acceptable income level to be approved for a personal loan, and the loan amount will depend on your credit score and the interest rate offered by the lender.
- Pledge Loan: A pledge loan is a personal loan that you take out from a lender backed with collateral that remains “frozen” by the lender until the loan is paid back in full. This type of loan is usually used to cover large, long-term expenses, such as a structural improvement on a home.
- Credit card: A credit card is a type of revolving loan. You will need excellent credit to be approved for a credit card, and the interest rate on a credit card can be high. You will also need to pay back the balance on your credit card each month, or you’ll begin to accrue interest.
Which option is best for home improvement costs?
There’s no one-size-fits-all answer to this, as deciding which option depends on your financial situation. Here are a few questions to ask yourself before deciding:
- How much money do I want to spend? If it’s an amount that’s under $5,000, you might consider using a credit card since you’ll be able to pay that off quickly. However, if it’s a larger amount, you should consider a personal loan or HELOC.
- How long do I want to borrow the money? If you only need a short-term loan, a credit card might be the best option. However, if you’re going to borrow longer term or prefer to break up your payments with the lowest interest possible, a personal loan or HELOC might be better.
- Do I have good credit? Credit is key when borrowing money for any purpose, particularly when it comes to credit cards. If you have a poor credit history, you’ll likely be charged high-interest rates and may struggle to pay back the loan on time.
- How much interest am I comfortable paying? The interest rate you’re charged will also depend on your credit score, the amount of money you’re borrowing, and the loan length. Credit cards typically have the highest interest rates, while debt consolidation loans, HELOCs, and home equity loans are the lowest.
- Is there a down payment requirement? A down payment is often required when borrowing money for a home improvement project, depending on the lender. Credit cards won’t require down payments unless it’s a secured card. HELOCs and home equity loans don’t require down payments either since they use your equity as collateral.
- Am I comfortable with the collateral? Lenders require some form of collateral, such as a security deposit to secure a large loan. Are you willing to put your assets up as a guarantee? If not, you should avoid loans requiring collateral or equity.
The bottom line
There are several alternative ways to pay for home improvements.
No matter which option you choose, make sure to research it thoroughly to understand all of the risks and benefits involved.