FOUR WAYS TO PAY FOR HOME IMPROVEMENTS
PAY CASH
You could pay cash for the improvements if you have the money in a checking or savings account. There are two drawbacks to consider before you go this route.
- Savings Depletion: A large project could quickly deplete your savings. Think about this in the context of the next 3-5 years. What other large expenses do you expect, and would it be useful to keep your savings on hand?
- Opportunity Cost: If a home improvement loan costs less than what you’re earning in your investment accounts, you may be better off investing your money instead of paying cash for the improvements. For example, would it be more useful to invest that money in a college savings plan for your kids or grandkids, or perhaps contribute more funds to your retirement account? Talk to your financial advisor for more details.
USE CREDIT CARDS
Some credit cards have very low introductory interest rates that last for a certain period of time. You could potentially tap into those offers if you’re confident you can pay off the card(s) before the introductory period expires. The drawback with this option is that life happens, and you may not be able to pay off the card as quickly as you initially thought. In that case, your interest rate could quickly skyrocket. Interest rates on credit cards can be brutally high.
HOME EQUITY LOAN OR LINE OF CREDIT
A home equity loan or line of credit is basically a “second mortgage” that you take on the house. You would leave your current mortgage as is and add a second mortgage with its own set of interest rates, payments, and terms. The main drawback with this option is that interest rates and monthly payments are typically higher than first mortgages, especially after the past few years of rate increases.
CASH-OUT MORTGAGE REFINANCE
You may be able to take out a larger mortgage and receive some extra cash at the closing. House prices have increased considerably, so many homeowners have enough equity in their homes to do this. Although you may have a higher interest rate with the new mortgage, this option could be worth exploring if the home improvements will add to your home's value. Your overall "blended interest rate" with this option may also be lower than it would be with any of the other options. Contact me to run the numbers for your situation.
Make sure to keep your home improvement receipts for tax purposes!
Source: Momentifi