It comes out of nowhere: All of a sudden, you hate the color of your walls. Or your bathroom sink. Or your kitchen counter.
have been a popular method of passing the hours spent at home during the . Searches “home improvement ideas”, “home improvement cost” and “ peaked between April and October of last year, according to an analysis by Rocket Mortgage. And this year alone, more than half of U.S. homeowners have made “substantial improvements” to their homes, according to a July survey commissioned by Selective Insurance.
There is no doubt about the power of renovation to energize. But unless you have piles of cash lying around, you might be wondering how to pay for upgrades. The good news is that there are many ways to fund a without upsetting your monthly budget. What you plan to expand your space or just want a change, here are some ways to finance the on your list.
Leverage the equity in your home
Most homeowners have a large portion of their net worth tied to the equity in their property. And it’s a great time to be in that position: The average selling price of existing single-family homes rose 22.9% to $357,900, according to a report released Aug. 12 by the National Association of Realtors. When your capital explodes, it can be a good time to tap into it. Here are some ways to do it:
Home Equity Loan
These secured loans allow you to borrow a lump sum against the equity in your home and usually come with a fixed interest rate and a repayment period of 15 or 20 years. Lenders generally require at least 15% equity in the property to qualify, and the specific terms of your loan will depend on your income, credit score, and debt payment history. Many lenders offer home equity loans, and it’s a good idea to negotiate with a few to get the best fixed interest rate, fees, and mortgage point prices available.
Refinancing by collection
Rather than adding a second loan to your original mortgage like a home equity loan, a cash refinance pays off your first mortgage, replaces it with a new (larger) one, and pays you the difference in cash. You’ll need a bit more equity to qualify compared to a home equity loan: typically, banks allow you to borrow up to 80% of the loan-to-value ratio, leaving 20% equity in your house.
Of all the ways you can tap into the equity in your home, fixed interest rates for this type of loan are usually the lowest because they are paid off before home equity loans in the event of bankruptcy. or input. That said, the terms of your loan will depend on details such as your home’s value, income, credit score, and other factors.
Home equity line of credit
Like a home equity loan, a HELOC generally requires 15% equity in the property to qualify. But where a home equity loan provides you with a lump sum, a HELOC is a revolving line of credit with a preset limit and a variable interest rate. Similar to a credit card, a HELOC allows you to withdraw, refund and then withdraw funds at any time. A HELOC also offers more flexibility when accessing your money by attaching a checking account to the funds. However, keep in mind that there is a trade-off for convenience; like other types of revolving credit, HELOCs typically come with the highest variable interest rates.
Apply for a home improvement loan
There are government loans specifically for home improvement and these are usually easier to qualify for than applying for a home loan. Here are your options.
FHA 203(k) Mortgage
This type of FHA-insured loan allows you to refinance your first mortgage by combining it with home improvement costs of $5,000 or more into a new loan. After your renovation is complete, your new loan amount is assessed based on a) the original property value plus the renovations, or b) 110% of the appraised value after the renovations, whichever is lower. The average loan term is 30 years, but loan limits vary widely by location, which you can read more about here.
Title I Property Improvement Loan Program
If you have little or no equity in your home, an FHA Title I loan may be the best option. Authorized by the National Housing Act, qualified lenders provide these loans with FHA insurance against possible losses. Interest rates are negotiated between borrower and lender, and the maximum amount you can borrow for a single family home is $25,000 over 20 years or $25,090 over 15 years for a manufactured home. A Title I loan will not change your mortgage status, and qualification comes with a simple set of requirements, including:
- Ownership of the property or a long-term lease on it
- A completed application that shows you are a good credit risk
- Signature of a note committing to repay the loan
You can use funds from a Title I loan to make “liveable and useful” improvements to your home, including architectural and engineering fees, building permit fees, title examination fees , appraisal fees and inspection fees. You also have the option of hiring a contractor or using the funds for DIY projects.
VA cash-out refinance loan
Provided by a private lender and guaranteed by the Department of Veterans Affairs, a VA refinance loan allows veterans, active duty members, National Guard and Army Reserve members to replace their current mortgages with new loans and use the difference to make home improvements. How much you can borrow depends on your income and credit score — and your assets and whether you’ve ever used your VA benefit also factor into the process.
Use a zero rate credit card
If you’re working on a minor renovation that you can pay off quickly, you might consider financing your efforts with an interest-free credit card. Some credit cards have up to 18 months of interest-free periods, which would allow you to pay for the renovation without incurring further interest charges. Taking advantage of the zero rate option of a credit card means creating (and sticking to) a repayment schedule that clears your debt before the end of the promotional period. As always, before using a credit card, think carefully if it’s the right choice for you.