4 Ways To Pay For Your Home Remodeling Project

My husband noticed the other day that the value of our home had risen. (He’s so good with stuff like that – I would have never even though to CHECK IT. Mercy!) But he loves all things financial, and was pretty pleased to see the equity we’ve built in the past couple of years. So he shared his joy with me! Which led to a conversation about a few remodeling projects we still want to complete in this house. Which led to a discussion about where we would pull the money from in order to make those changes.

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Somewhere along the way, Jorge Adevop sent me an email to see if I was interested in publishing his article regarding ways to pay for remodeling projects, and yes, I was interested, not only in publishing it, but in reading it for myself! Check out his ideas below…they’re good ones!

Putting money back into your home through remodeling to maintain a modern look and appeal is usually a wise investment, but the scenario has to make sense and you should never be over extending yourself if the line between income and expenses is getting extremely thin.  There are, however, certain times when finding funding for your investment makes very good sense, especially when you have a good strategy on how your going to pay it back, maybe even quicker than its term. If you’ve been looking into alternate funding sources then here are a few for you to consider:

Cash/liquid assets

This first method isn’t necessarily a financing option, but it’s important to note that paying for anything in cash is never a bad option.  It’s also extremely helpful to show that you have extra capital saved up when you’re coupling this option with any other financing option through a financial institution.  The more capital you have saved up, the higher the loan can be and chances are that you’ll be able to negotiate a lower interest rate as well. If you’re set on paying off the remodeling project without having to reach out to a bank then you can also sell off assets such as stocks, bonds, land, or vehicles, anything worth value can be sold off to help pay for the remodeling job.

HELOC

A Home Equity Line of Credit, HELOC for short, allows you to burrow against the equity you’ve built up into your home and it allows you flexibility in borrowing and paying the money back.  In many ways a HELOC is much like a credit card where the lender approves you for a certain amount and then you’re allowed to use that line of revolving credit for your purchases.  

A HELOC will usually approve somewhere between 85-90 percent of the current appraised value of your home, depending on the institution you use.  As an example, if you’re in need of appliance repair and a basement remodel and your home appraises for $500,000 and you currently owe $400,000 on your loan and the bank allows up to 90% of the appraised value, then you’d be able to borrow up to $50,000.

One of the major benefits of a HELOC loan comes with its borrowing flexibility as you can have a long as a 10 year borrowing period and the payback period can be as long as 30 years, however, every pro comes with a con.  HELOCs are a second mortgage, so it’s backed by the value of your real estate. If you default on your payment you are setting yourself up for a potential foreclosure of your home. Like any other form of credit, if you see difficulties in paying the funds back per the terms of the agreement, you should not more forward with the loan.

Cash-Out Refinance

If you choose this option, it’s simply a refinance of your home, but you can pull out cash at the closing.  Currently, you can borrow up to 90% of the value of your home. The only way this loan works is if you have equity in your home, if the equity you have in your home is a bit thin to fully cover the remodeling of your home then you could always pair up this option with cash savings.

The cash out refinance option has some strong benefits such as a fixed interest rate and fixed term.  The monthly payment is typically very low because you can extend it all the way out to 30 years from the borrow date and for those that are very handy, you can actually take the money and do the renovation work yourself.  With other options you may be required to hire out a contractor, but the cash out refinance option does not impose this requirement.

Renovation Loans

This loan is very similar to the previous option we discussed, however, there is one main difference between the two options.  The renovation loan does not loan based on the current value of your home, instead, it loans against the future value of your home.  Say, for example, that you currently own a home that is half finished and the other half needs a complete rehab. Picture a home that is gutted down to the studs.  Let’s assume that you owe $100,000 on the home, but if you invested another $40,000 into its renovation it would reasonably be worth $200,000 (a formal appraisal would be needed to confirm this value).  If the lender loans at a 90% after repair value (ARV), then you could take out as much as $80,000 to complete renovations.

This loan does come with more oversight by the lender, they will want to make sure a contractor does the major work and they will only pay out once certain milestones have been achieved.  From the lenders point of view, this loan is riskier in nature so it typically comes with higher interest rates and higher closing costs.

Either way you decide to go, having liquid cash set aside for unexpected events is always recommended and you should never go outside of your comfort level in terms of borrowing.  When working with contractors you should always start with small projects and then reward them with larger projects as they prove that they can accomplish great work in a timely manner.  Good luck!

Jorge is a husband and father to one daughter and also has two dogs.  When he’s not busy with fatherly duties, he enjoys the outdoors and trying craft beers.  Understanding and applying financial concepts to his own life helps him invest his money wiser through real estate opportunities he comes across.  He also enjoys writing about his investing knowledge and experiences.

Valuable information, thanks so much, Jorge!

Have YOU ever gone through one of these avenues to pay for YOUR home remodeling project? How did it work out for you?

It is not always possible for me to respond to each blog post comment. However, I absolutely do read them all, and if you’d like to address something specific, or have a question for me, please don’t hesitate to email me at Kristen@theroadtodomestication.com. I will respond to your email as soon as possible! Thank you for visiting the blog!

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