If you are like many other homeowners, you have a long list of remodeling projects you’d love to do to your home. Maybe you want a new kitchen, new windows, or to refinish your deck. There are a variety of home improvement projects you can do, but they all cost money. Home improvements can often break the bank.
If you don’t have the cash, you may find yourself struggling to find a way to pay for the renovations. Many people turn to their home equity. But, what if you don’t have any? Where does that leave you? Even if you have room in your home’s value, you may not want to leave that money alone.
We’ll let you in on a few secrets that allow you to make renovations without touching your home’s equity.
Use Your Credit Cards for Home Remodeling
If your home renovation project isn’t overly expensive, your credit cards may do the trick. If nothing else, you can buy the material for the project. If you do the labor yourself, you have everything you need. You’ll just need to be careful with this method. Credit cards often charge high interest rates. If your costs are small and you can pay them off relatively soon, you have nothing to worry about.
If, however, you know it may take you years to pay off the balance, you may want to consider one of the methods below. The interest can really add up if you wait years to pay off your balance.
If you have access to a 0% credit card, though, you could be in good shape. Pay close attention to when the interest rate would adjust and try to pay the balance off before then. For example, if you have 18 months with no interest, pay the balance off before then. If you can’t pay the full balance off, pay off as much as you can. This will reduce how much the renovations cost you in the end.
Take out a Personal Loan for Home Renovations
A personal loan differs from a mortgage because there is no collateral. You don’t have to put up your home. This cuts out the risk of losing your home should you default on the loan. However, because there is no collateral, you’ll often pay higher interest rates on a personal loan.
Personal loans are often easy to qualify for, but make sure you read the fine print. Remember, you don’t get the tax write-off on the interest you pay on a personal loan. Pay close attention to the term and any penalties. For example, if the loan has a balloon term, you could owe a large amount of money at the end of the term. If there is a prepayment penalty, you may end up paying much more for the loan than you planned if you pay it off early.
Take Out a 401K Loan
While it’s not often recommended to take money out of your 401K, there are a few exceptions. Namely, if you plan to stay at your job for the long term, this could be an affordable option. You’ll still pay interest on the loan, but it’s interest you pay to yourself. The biggest issue is the compounding interest you lose out on by taking out your principal. If you know you can repay the balance rather quickly, though, it can work to your benefit.
You usually have up to 5 years to repay the money you borrow. Keep in mind, though, if you leave your job, you may only have a few months to pay the full balance back. If you don’t, you’ll pay a 10% penalty, plus income taxes on the money you withdrew.
401K loans are often safest when you have a hardship. A good example is if your home experiences serious storm damage and needs renovations quickly. If you don’t have the money and don’t have equity in your home to tap into, a 401K loan can help you in an emergency.
Considerations to Make
No matter which type of loan you consider, think of the following factors:
- What’s the interest? Don’t pay attention only to the interest rate, but also the amount of interest you’ll pay over the life of the loan. Consider the term and look at the bottom line. You want to know how much money the loan will cost you in the end. A smaller interest rate doesn’t necessarily save you money unless it’s on a shorter term.
- What’s the term? Read the fine print of the loan. How long will you pay on the loan? Is it a fixed interest rate? Is there a prepayment penalty? This will help you figure out your bottom line. You want to know how much the loan will cost you in the end.
- What’s the cost? Personal loans may cost you closing costs. A credit card may have an annual fee or balance transfer fee. A 401K loan could have penalties if you leave your job or don’t pay the loan back in time.
If you have room in your home’s value, compare the cost of a home equity loan to your other options. A HELOC will use your home as collateral. But if you can secure a better term and interest rate it may be worth it. As is the case with any loan, you shouldn’t borrow money unless you can afford to pay it back.
Think not only of the short-term, but how the loan affects you in the end. What will happen if your income changes? How will you pay the loan off? The answers to these questions can help you determine which loan will work even if you don’t have any home equity.Click to See the Latest Mortgage Rates»