By Andy Towne, Plymouth and Okemos Branch Manager
Whether you’re renovating a kitchen, adding more space, remodeling that old bathroom or finishing your basement, every homeowner has dreams of how to improve their home. Just as the myriad of improvement projects possible may seem daunting, so may the many different ways to pay for it.
Even if you have the cash on hand to finance your project, there may be more financially savvy ways to accomplish your goal of living in the home you always dreamed of. Just as the needs of your family are unique, so is each individual’s financial situation.
When it comes to financing home improvements, you may find many different options available to you. These options include:
Here is some basic information concerning some of your options.
Liquidating Personal Savings or Retirement
Logically, you may be thinking that the cheapest way to finance a home project is with cash. Using liquid personal assets will result in zero finance charges and may be the best option to pay for your project. However, this does not factor in the value of your cash over time. While the cheapest financing may be your own, cash on hand has the potential to grow over time and possibly more than offset the cost of financing. Maintaining your liquid assets leaves you more cash and allows your personal savings to continue to grow over time. The best advice in this scenario is to discuss the liquidation of any liquid personal asset with a financial professional to see how this might relate to meeting your overall financial goals.
Personal Lines of Credit (Credit Cards)
Credit cards are one of the most widely used and widely available forms of consumer credit. While the convenience of this product cannot be disputed, it is not the most cost effective way to finance a project. Lines of credit, or revolving lines, accrue their interest very differently from a fixed term loan. Credit cards excel on short-term financing where you are only charged interest on what you owe, but if your goal is to set your repayment on equal monthly installments over time, this is not the most cost effective option. Additionally, rates on credit cards are usually adjustable and are frequently much higher than other forms of available financing.
Personal or Unsecured Loans
If your goal is to repay your project in equal monthly installments, and the amount of credit needed is minimal, personal or unsecured loans are a viable option. However, these loans are limited in the amount you can borrow and are usually amortized over a shorter period of time, resulting in a higher monthly payment. These loan amounts are usually smaller and financed over shorter periods of time so the interest rates charged are usually much higher than other available options.
Home Equity Loan or Home Equity Line of Credit (HELOC)
When deciding to finance improvements to your home, a Home Equity Loan or HELOC may be the most cost effective option. The difference between a Home Equity Loan and a HELOC is whether the amount you borrow is a fixed amount, or if you have a line of credit that you can access in the future. Much like the difference between a loan and a credit card, these products calculate interest differently and care should be taken in deciding what product is right for you. Home equity loans and HELOCs have the benefit of being secured by the available equity in your home and therefore can have higher loan amounts, credit limits, and lower interest rates. Home equity loans are most often a fixed rate loan, and lines are usually adjustable, so you should consider if a more consistent payment option is right for you. If you have available equity in your home, these products are a great way to obtain financing and have numerous benefits over traditional credit cards or unsecured loans.
Cash-Out Refinance of Your Existing Mortgage
While a home equity loan or HELOC usually falls in the second mortgage position behind your existing mortgage, sometimes it makes more sense to refinance your current mortgage. If you have not reviewed your current mortgage rate in awhile, you could possibly reduce that interest rate and add the cash you need to your existing mortgage balance. If you have a higher interest rate than what is available today, you might find it more cost effective to explore this option. There are many factors that go into deciding to refinance and you should discuss this in detail with a Michigan First Mortgage Loan Officer. Some factors to consider include: your current interest rate, how long you have been paying your existing mortgage, and the total interest expense of your new loan versus your current loan. Often times you can add the benefit of reducing the cost of your existing mortgage and get the money you need to complete the renovations you always wanted. This coupled with the possibility of a reduction of interest expense and monthly payment could make this the best overall product for you.
The options you have to finance improvements and renovations are endless, and everyone’s financial situation is different. To discover what options are right for you, call our team today at 877.312.9033.