How to Pay for Home Renovations

Planning a Home Renovation

Planning a renovation can be difficult but that doesn’t mean it has to be. First, decide what kind of renovation you are going to do. Does the yard just need some sprucing, do you need a new roof or are you planning on doing the whole house? This can help you figure out if you can do this renovation just by using any extra cash you have or if a loan is necessary.

If you are renovating the whole house, then it is recommended to start from the top and work your way to the bottom. For example, you would start with the ceiling and make your way to the floors. That way you don’t end up ruining the floors with drywall or paint.

Next, you need to figure out if you plan to do the whole project at once or pay for it in pieces and do one room at a time. Honestly, either option could work depending on the type of renovations you are doing and if you plan to still live in the house while the renovations are happening.

Another thing to consider is if you have budgeted for one project, such as floors, if the ceiling and walls need to be done as well would it make more sense to do them at the same time as the floors and if so are you able to get a loan to cover it. While it isn’t 100% necessary to do these things at the same time, it can save the flooring in the long run and make your life easier. When coming up with your plan it is important to consider things like this.

Lastly, once you have figured out the logistics of the renovations, then it is time to decide on the materials and if you are hiring a contractor or doing it yourself.

Should you Hire a Contractor or DIY?

Whether you choose to hire a contractor or DIY depends on a few different factors. But it really comes down to if you are able to do the job yourself, if permits/structural plans are needed and the budget.

Even though it is more costly, hiring contractors to ensure that the renovations are done up to code and are normally guaranteed by the company. That way if there is a problem in the future it is up to the company to deal with, and you don’t incur any unexpected costs. The job is to be most likely also able to be done quickly because you won’t have to work around your schedule.

However, there are also some benefits to choosing to DIY your renovation such as flexibility on the timeline, less financial cost, and flexibility in the design. As long as you are able to follow the building code when you are doing your renovations you can take as much time as you need to complete them, even room by room. Because you aren’t paying for the labor the cost is much less and you can let your creativity shine. If it’s something you are interested in, you may even learn some new skills along the way.

Building a Home Renovation Budget

Now that we have gone over the basic logistics of a home renovation, let’s discuss the budget. How much can you reasonably afford? Do you have savings to cover the costs, or do you have to take out a loan for the whole amount? These are all important things to consider.

First, if you intend to take out a loan for the whole cost of the renovation, take a look at your finances and see how much you can reasonably afford in monthly payments. Once you have that figured out then you should figure out if you have access to loans and how much you are able to get. Then you can calculate the cost of the renovation and see if you can get an approval large enough to cover the estimated costs. It is important to budget for an amount reasonably higher than the estimated cost to cover any unexpected expenses.

Calculating the Costs of Home Renovations

When calculating the costs of the renovation there are 2 different ways to do this.

• The square foot calculation method
• The Full-cost method

The first is done by looking at the material cost compared to the square footage. This only really gives an approximate cost because as the square footage you are renovating increases, the cost per square foot goes down. This could give you an overage cost which really isn’t a bad thing because, as discussed above, unexpected events happen, so it is important to have extra in the budget to allow for that.

Next would be the full-cost method. This takes into account the professional trades involved in the renovation and the material costs. This can be difficult if you are new to renovations, but professional estimators are available and can give you a good, estimated cost; most of the time for no cost. This also allows you to have different companies give you quotes to compare costs and choose the best option that works for you and your budget.

Once you have determined the estimated costs, then it is time to decide how you are going to pay for the renovations. Most people choose to pay for them with some type of loan. The great news is there are many different loan options to choose from.

Renovation Loans

When it comes to renovation loans, many people don’t realize that because you own your home you have access to more money than you think. Especially if the money is used to improve the value of your home. Here are a few of the different types of loans you could qualify for:

• Home Equity Line of credit - These types of lines of credit usually do not have a fixed payment and only charge interest. The principle can be paid as you choose. With home equity lines of credit, you can usually get up to a maximum of 65% of the purchase price.
• Home Equity Loan - A home equity loan is a bit different. This is a secured personal loan that does require a monthly payment. However, with this type of loan, you can borrow up to 80% of the value of your home minus whatever you owe on your mortgage.
• Mortgage Refinancing - When you use this method you basically add the renovation costs to your monthly mortgage payments. The general rule is if your mortgage is below 80% of the current value and you make enough to pay a larger mortgage, you can possibly go this route.
• Personal Loans - You can also get an unsecured loan. Depending on how much you need, you can get a personal loan between $500-$50,000 that does not use the equity on your home.
• Credit Cards - The last option is credit cards. While credit cards are expensive and have higher interest rates than other loans, they can be used strategically when renovating your home. Many home improvement and appliance stores offer 0% promotions with their credit cards which can give you up to 1 year to pay off the amounts with no penalties. It is important to pay attention to the fine print on these but, if used properly, they can save you a lot of money in interest.

When you are looking into these loans it is important to verify that the amount you borrow is within your means to pay back. Especially when it comes to a secured loan like the home equity loan, home equity line of credit, or mortgage refinancing. If these are not paid back the lender uses the home as collateral and can take it from you which would negate the reasoning behind the renovations. So, take a look at your monthly expenses and make the renovation amount is doable before agreeing to any loan. It is also important to remember with any type of loan there are lending fees to take those into accounts as well.

Renovation Lines of Credit

When it comes to which type of line of credit you get to renovate your home, it really depends on how much money you are needing to borrow. You can get a personal line of credit (also known as an unsecured line of credit), that has no collateral or a home equity line of credit. Both of these have positives and negatives

Home Equity Line of Credit

While the premise of each type of line of credit is the same, there are a few differences. The main one is the amount. Generally, you can get a higher amount when getting a home equity line of credit. This is because it is coming out of the equity of your home. As discussed above, you can borrow up to 65% of the purchase price. Because of this, though, it is more difficult to obtain a HOLOC and the application process is more difficult. It is also important to keep in mind though, that this type of line of credit can result in losing your home if you default on it. Before you agree to one, verify the amount that you take is in your budget to pay back accordingly.

Unsecured Line of Credit

With an unsecured line of credit, the borrowing limit is based on your credit score as well as your credit history, credit limit, and debt to income ratio. Because of this, the amount will be much lower. However, unless you are in need of a large lump sum immediately, this is still a great option to pay for some of the renovations. Another bonus with these is they can be paid off and used as many times as you like without risking your home.

Renovations and Mortgages

If a line of credit doesn’t seem like the best way for you to pay for your home improvements, another option may be your mortgage. Depending on how much you still owe and the value of your home you may be able to get a second mortgage or refinance your current mortgage.

Refinancing your Mortgage

The great thing about refinancing your current mortgage is that you aren’t adding another monthly payment to your current bills. You can access up to 80% of the home’s market value depending on how much you owe on your mortgage. There are 2 types of refinancing. Rate and term refinancing and cash-out refinancing. Rate and term allow you to change your monthly payment without changing the principle and allow you to shorten or extend the term. The cash-out option gives you your home’s equity in exchange for a higher principle on your mortgage. For a renovation, you are more likely to use the cash-out option, but the rate and term refinancing will free up cash monthly if you just want to save up or slowly do the renovations over time.

By using either of these options, you will likely have a lower interest rate than any type of line of credit or personal loan, however, there is often a refinancing fee if you refinance earlier than your term allows. This could mean you may have to go with a higher interest rate. Depending on what you still owe on the mortgage and how much you are refinancing for, it may be better to go with a second mortgage instead.

Obtaining a Second Mortgage

A second mortgage is a loan that’s taken out against the equity that you have in your home. This allows you to access that without affecting the interest rate of your current mortgage, it, however, does add another payment to your current bills and usually comes with a higher interest rate. Your mortgage lender will be about to let you know if either of these are a good option for you.

Renovation Loans for First-Time Home Buyers

While there are some advantages to being a first-time home buyer, the loan options to pay for home renovations are the same as other homeowners. However, because you can choose to put down a lower down payment (5% instead of 20%), this could help in funding the renovation.

Paying Cash for home renovations

While taking out any type of loan is a great option to be able to afford your home improvement projects, there is something to be said for being able to pay for them in cash. For one, it ensures you can afford the renovations. It also avoids some processing fees when paying for materials and contractors. And, because you don’t have to wait for an approval or to access the money, often you can get the job done faster.

Even if you don’t have the cash when it is time to renovate your home, it is never too late to build a monthly budget and start saving money for the next time or just to pay the loan off early.

Let Spring Financial Help

Understandably, paying cash for home improvements isn’t always an option. If you are looking for an unsecured personal loan to help with this, Spring Financial can help. Whether you need $500 or $35,000, we can have it e-transferred to you in as little as a few hours and you can get those projects started! Apply online, chat with one of our agents or give us a call at 1-888-781-8439.