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How to Pay for Home Renovations: The Pros and Cons of Financing Options

A person doing construction to depict how to pay for home renovations

Are you considering making some improvements but wondering how you should pay for home renovations? This article takes a look at the financing options available.

Author: Martin Lundgren

Are you wondering how to pay for home renovations? Large house projects can be exciting yet daunting, especially when it comes to financing. For many of us, several options are available, including HELOCs, family loans, and even selling stocks. This blog will explore the pros and cons of the different financing options to help you make an informed decision that aligns with your financial goals and lifestyle.

Pay for Renovations with a Home Equity Line of Credit (HELOC)

To start, a Home Equity Line of Credit, or HELOC, is a popular choice for financing home renovations. This option allows you to borrow against the equity you have built in your home. Essentially, a HELOC functions like a credit card: you have a revolving line of credit, and you can draw from it as needed.

Pros:

  • Borrow only what you need, when you need it.
  • Interest rates are typically lower than credit cards and personal loans.
  • Interest may be tax-deductible if the loan is used for home improvements.

Cons:

  • There is some risk — your home is used as collateral, which means you could lose it if you default.
  • HELOCs usually have variable interest rates, which can increase over time.

Use a Renovation Loan to Finance Your Project

You could also go with a renovation loan. A renovation loan is an FHA-backed loan that allows a borrower to finance the purchase and renovation of a home with a single mortgage. These are specifically designed to help you finance home improvements. Renovation loans can come in different forms, such as a personal loan, an FHA 203(k) loan, or a Fannie Mae HomeStyle loan.

Pros:

  • Funds are specifically earmarked for home improvements.
  • Many renovation loans offer fixed interest rates, providing predictability in repayments.

Cons:

  • The approval process can be stringent and requires detailed plans and estimates for the renovations.
  • May have higher interest rates compared to HELOCs.

Have Stocks? Think About Selling Them for Extra Cash

As you explore your options for how to pay for home renovations, consider your stocks. If you have a robust stock portfolio — or company shares burning a hole in your pocket — selling some of your stocks could be a viable option to fund your renovations. This method provides immediate cash without increasing your debt load. (This would be a great conversation to have with your financial advisor before making any decisions!).

Pros:

  • Liquidity — you can access funds quickly.
  • It means you avoid taking on additional loans or interest payments.

Cons:

  • There is some market risk; selling stocks means you might miss out on future gains.
  • Capital gains taxes could be significant, depending on how long you’ve held the stocks and your tax bracket.

Consider Refinancing Your Existing Loan

Did you know that refinancing your mortgage can be a way to tap into your home’s equity to fund renovations? However, given the current high interest rates, this option may not be your best bet at the moment.

Pros:

  • You can consolidate your mortgage and renovation costs into one loan.
  • There is potential to secure a fixed interest rate.

Cons:

  • High interest rates can make this an expensive option right now.
  • Refinancing involves significant closing costs and fees.

Get Personal and Borrow Money from Family

As an article by Schwab notes (or advice you might hear from, oh, just about anyone), be sure you know what you’re getting into before you agree to a family loan. Though borrowing money from family can seem like an easy way to finance your home renovations, it’s essential to approach this option with clear terms to avoid any misunderstandings.

Pros:

  • You can negotiate terms that are mutually agreeable.
  • Family members may offer loans with little to no interest.

Cons:

  • Money can strain relationships, so clear communication is essential.
  • Gifting large sums of money can have tax consequences for the giver.

Margin Loans Against Stock Portfolio

Have you heard of margin loans? Tread lightly. These are interest-bearing loans that can be used to gain access to funds for a variety of reasons that cover both investment and non-investment needs. Margin loans allow you to borrow against the value of your stock portfolio. While this can provide quick access to funds, it’s a complex option that carries significant risks. We cannot underscore enough the importance of consulting with your financial advisor to ensure this method aligns with your specific situation.

Pros:

  • Get quick access — obtain funds without liquidating your investments.
  • Interest on margin loans may be tax-deductible.

Cons:

  • If your stock value drops, you may face a margin call.
  • Interest costs can be high and variable.

Final Thoughts about Home Reno Financing Options

When considering how to finance your home renovations, it’s essential to weigh the pros and cons of each option and consult with your financial advisor. Your decision should align with your long-term financial goals and risk tolerance. Whether you choose a HELOC, a renovation loan, or another method, thorough planning and professional advice can help ensure your home improvement project is both financially sound and successful.

Remember, every financial decision is unique and should be tailored to your specific circumstances. If you’d like to explore these options in detail and determine the best course of action for your situation, reach out to a Northern Lights Advisor today.

 

The information in this article is not intended as tax, accounting, or legal advice. Read the full disclaimer here.

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