If you've lived in your home for several years, chances are you've given some thought to making a major home improvement. From building a shed to adding on a room, there are dozens of ways to change the look of your house to make it more modern or bring it up to date.
However, before deciding to make a home improvement, give some thought to how you will pay for it. Obviously the best method is to fund the improvement by cash. But if it is sizable, that may not be possible. Here are a few options to consider:
1. How long will you live in the home? If you are thinking about moving in a few years, adding a home improvement right now may not pay off for you. Financing a long-term payment for a short-term benefit means that unless you sell your home at profit that is large enough to include your investment, you will lose money. For example, putting in a below-ground swimming pool is an improvement that seldom earns back its cost. Decide if this is a feature that your family must have before buying it now, especially if you plan to take out a home improvement loan.
2. What is the rate of interest you will pay for a conventional loan? If the loan's interest rate is a double-digit figure, the loan may end up costing more than you think if you continue making baseline monthly payments only. Shop for a low interest rate, preferably one with an introductory 0% rate for six to twelve months. This would provide a definite advantage, especially if you can pay off the loan early. Avoid getting a loan with points or other expenses. Ask about all possible costs over the life of the loan.
3. Will you use a home equity line of credit? If you do, will you use the same bank or financial institution that holds your home’s first mortgage? The benefit is a tax credit. But keep in mind that you will now have a second mortgage. If you should default in making payments on the account, theoretically you could lose your home. Discuss the terms with your lender to be sure you understand all possible risks before taking this step.
4. Do you plan to dip into savings? Borrowing from a short-term savings account will reduce the amount of funds that will be left to cover emergencies that might occur, such as roof damage from a storm or flooding from heavy rain. Taking money from a long-term savings account could take away money from future projects, such as a vacation or early retirement. Of course, if you planned these accounts to include expenses like home improvements, you're in good shape. But if not, remember that you may be robbing Peter to pay Paul.
Funding a home improvement requires that you find money from somewhere to cover this expense. Take time to consider all options thoughtfully, including whether you really want or need the improvement, whether you need it now or it can wait, and whether you truly have the means to pay the costs.
