Matt Weber
Matt Weber is editor of Home Improvement & Repairs magazine based in Birmingham, Alabama.
Find more at www.homeimprovementandrepairs.com.
Remodeling a home can be expensive. Even a thrifty do-it-yourselfer who owns tools and has home-improvement experience can run up a hefty bill in materials and supplies. Repairing a home can also be expensive, but making repairs should take priority over optional remodels, because damage to a house tends to exacerbate when left unaddressed. Whether you’re undertaking a remodel or a repair, costs can accrue quickly, but you have a few options to manage them.
Emergency Fund
It is wise for homeowners to establish an emergency fund to help offset the unforeseen cost of surprise repairs. As many Alabama homeowners are aware, addressing certain common emergencies simply cannot be delayed. Common culprits include a backed-up septic system stinking up the neighborhood or damage from severe storms.
Insurance Coverage
When it comes to severe weather damage, one way to prepare is to review your homeowner’s insurance to decide if your coverage should be adjusted. This includes considering add-ons for certain types of weather damage you may not have anticipated when you first bought your home.
Cash is King
Saving money for optional remodels is not always feasible, but the more you save in advance, the more money you save in the end. When you pay directly from checking or savings, you accrue no interest, no debt, and maintain full control of the budget.
Contractor / Manufacturer Financing
Many professional remodeling contractors (especially for kitchens, baths, windows and roofing) partner with lenders and/or manufacturers, so they can offer discounts, deferred interest or low-rate promotions. However, you should always read the fine print, because rates can skyrocket after the promotional period.
Credit Cards
Although credit cards may seem quick, easy and convenient, people can get into a lot of trouble using them. Zero-percent introductory APR on cards can appear attractive, and some homeowners expect to pay off the balance quickly. However, if that $5,000 to $10,000 project remains on the balance sheet after the promo period, the interest rate can become 15 to 25 percent, and then debt can balloon fast. Know the risks.
Personal Loans
Homeowners often have the option of securing a personal bank loan. A bank, credit union, or online lender may offer loans of $5,000–$50,000+ with terms of 2 to 7 years. The rates are fixed, and no collateral is required. These loans typically have higher interest rates than home-secured loans (usually 7 to 20+ percent, depending on credit).
Home-secured Loans
Using the value of your home to secure credit may present options. A home equity loan (second mortgage) is a lump-sum loan based on your home’s equity with a fixed interest rate and fixed monthly payments. A home equity loan typically offers lower rates than personal loans (often 7 to 10 percent), and the interest may be tax-deductible if used for home improvements.
A HELOC (Home Equity Line of Credit) is a revolving credit line you draw from as needed (like a credit card but secured by your home). It comes with variable rates, often with a draw period (5–10 years) followed by repayment.
A cash-out refinance replaces your current mortgage with a new, larger one, and you take the difference in cash. This can achieve a potentially lower overall rate. A cash-out refinance resets your mortgage term and entails closing costs of 2 to 5 percent of the loan, so this only makes sense if rates are favorable.
If you are considering taking a large loan for a major home project, always do plenty of research and consult a knowledgeable financial professional. Financing partners may be able to use alternative credit models to assess applicants with non-traditional credit histories, opening the door for homeowners who have the ability to pay over time but would not otherwise qualify for conventional credit.