The best part of a home improvement project often is the part when the contractors finally leave. The cost isn't far behind, though, which makes understanding your financing options that much more valuable.
Kevin Mahoney, CFP®, is the founder & CEO of Illumint, which offers virtual financial planning specifically for the millennial generation. For more on his work with student loans, 529 plans, buying a house, & more, check out illumintadvisors.com. You also can connect with Kevin on:
Hi, I’m Kevin Mahoney, the founder of Illumint. I’m in D.C.’s Georgetown neighborhood today thinking about how you might want to cover the cost of a major home improvement project.
Let’s assume that you’re remodeling a kitchen or replacing your roof, both of which likely require more money than you have available in a savings account. If the cost isn’t too high, though -- let’s say under $12,000 -- you might first consider a new credit card that offers an extended interest-free period. In this case, make sure you have a clear path to paying off the debt before the credit card terms become unfavorable for you.
When a project will run you much more, though, you’re probably looking at an unsecured personal loan, home equity loan, or home equity line of credit. You typically can obtain a personal loan pretty quickly, but you’ll probably get a higher interest rate than with a home equity loan. A personal loan may be a good choice, though, if you don’t have much equity in your home or can find a good offer from a credit union or alternative lending source.
Now let’s assume you have more than 25% equity in your home, and you want to avoid refinancing your mortgage. A home equity loan essentially functions as a second mortgage that provides you with lump sum funding at a fixed interest rate. As with your first mortgage, the loan may include closing costs and fees, but you also may be able to deduct the interest that you pay.
With a line of credit -- as with your credit card -- you’ll typically get revolving access to funds. You only pay interest when you borrow, not on the entire line of credit. And the initial interest rate also may be lower than on a home equity loan, but in exchange, you’ll get a variable rate that can generate higher monthly payments in a rising rate environment. You can draw on the line of credit for 10-15 years, and then you begin to repay the principal borrowed over the next 15 years.
Clearly, there are a lot of factors at play here. Start with this: meet with several contractors, and try to lock down the project cost and timeline. Then also evaluate your risk tolerance: are you comfortable leveraging your home equity? And are you willing to bet on interest rate movements? The answers to these questions may make your decision more straight forward than you anticipated.
The information on this site is provided “as is” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Illumint disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement and suitability for a particular purpose. Illumint does not warrant that the information will be free from error. None of the information provided on this website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall Illumint be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if Illumint or a Illumint authorized representative has been advised of the possibility of such damages. In no event shall Illumint have any liability to you for damages, losses and causes of action for accessing this site. Information on this website should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.