Although
it's settled from its peak of 7.79% last October, with the average interest
rate for a 30-year mortgage currently at 6.69%, according
to Freddie Mac,
some Americans have understandably been holding off on purchasing a new home. This
is a reality for many, as relatively low inventory coupled with higher rates
means less affordable monthly payments.
Just
because we're staying in our houses longer, though, doesn't mean we've lost
the impulse to change things up and rejuvenate our surroundings from time to
time. Whether a fresh coat of paint, a new kitchen, or an addition, updates to
our existing homes can make them feel fresh without having to pick up and move
entirely.
If you're
planning on sticking around for a few more years or if you want to make your
current house your dream home, here are a few ways to pay for your home
improvement project without completely breaking the bank.
Using
your house itself…
If
you've been there for a while, have paid down enough of your mortgage and seen
enough appreciation, you may have enough equity in your home to pay for the
improvements. Why not use the value of your home to increase its future value?
There a few primary ways to accomplish this:
- Home
Equity Line of Credit (HELOC)
Typically
allowing you to borrow up to 85% of your equity, HELOCs are lines of credit you
can draw from as needed. Like a credit card, you only accrue interest on
amounts you actually draw against your available credit. Interest is calculated
based on the Prime Rate set by the Federal
reserve
(currently 8.50%), plus a margin. Unlike credit cards, this interest rate is
significantly lower than the average APR of 27.94%. You usually have 10 years to
spend money needed on a HELOC and 20 years after that to repay it in full. It's
a great option given the flexibility and ability to control how much interest
you end up owing if you pay back the debt expeditiously.
Although
it sounds and operates similarly to a HELOC, a home equity loan lets you
receive the funds in a lump sum up front, usually needing to be repaid within
15 years. Still allows you to tap into your home equity, but means that you
immediately start accruing interest on the full amount.
A
cash-out refinance essentially replaces your existing mortgage or (if your home
is already paid off) establishes a new one in the amount you need relative to
your equity. If you qualify, you get the difference between what you owe and
what you need as an immediate infusion of cash to your bank account, then start
paying interest on the total amount of the new loan.
Going it
on your own…
If
you don't have enough equity to tap into, there are other paths to explore:
If
you're fortunate to have saved enough cash, you can obviously use your own
resources to pay for a renovation. It's always wise to set aside some funds
each month in a separate savings account to cover known and unknown expenses,
like property taxes, a new HVAC system, or a new roof. It'll make sense to use
cash as opposed to debt to finance a renovation if the interest you're getting
on your cash reserves is less than what you'd have to pay in interest
expense on the debt.
Personal
loans boast less stringent underwriting than home equity and mortgage loans.
They usually charge higher interest rates, although lower than most credit
cards. The other downside is that you typically don't qualify for as large an
amount, so this may be a better option for smaller projects. As with any loan,
the better your credit score, the lower your rate. You'll usually see repayment
terms anywhere from 2-7 years.
Although
it wouldn't make sense to add significant debt to an existing credit card with
a double-digit APR, many credit cards offer 0% intro APR on terms of 12-18
months. If you can pay off the debt within that time frame, this could be a
good option to look into as well, especially considering that charges could
earn you rewards points in the meantime.
Some
homeowners may also qualify for up to $25,000 in Title 1 loans through the U.S. Department of
Housing and Urban Development (HUD).
Remember
if you're doing energy efficient upgrades to your home, that the 2022 Inflation
Reduction Act allows homeowners to deduct 30% of these improvements on their
federal tax returns, subject to certain annual limits, as home energy tax credits.
Happy
renovating! Let us be as resource to you and your loved ones as you contemplate
either a move or improvement to your existing home.
If you would like to receive more information
on making smart money moves for your future, be sure to contact us today!
