Is it a good idea to borrow money for home renovations?

Whether it’s an outdated master bathroom, a closed kitchen with dying appliances, or a playroom in need of a facelift, you might have some renovations you’d like to tick off on your. listing. The advantage of renovating your home? You can increase its value while improving your quality of life while you are there. The wrong side? The cost involved.

Home improvements can be expensive, and if you don’t have the money to pay for them, your only choice may be to borrow to finance these projects. But is it a good idea?

It actually depends. There are some types of loans that make sense for home renovations, and others that don’t.

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The best ways to borrow for home renovations

If you need money to finance a home improvement project, charging it to a credit card is usually not a good idea. With a credit card, you will usually pay more interest than with any other type of loan. Plus, too much credit card debt could hurt your credit score, making it harder to borrow money the next time you need it. And while it might seem like a good idea to finance a home improvement project with a personal loan, since you’ll typically pay less interest than with a credit card, there may be better options.

A home equity loan

Equity is the amount of your home that you own and you can borrow for any reason. If you need to finance renovations, a home equity loan could be a good bet. With one of these loans, you will usually get a lower interest rate than a personal loan, and home equity loans are quite easy to obtain because your home is used as collateral.

This means that you run the risk of losing your home if you take out a home equity loan and fall significantly behind on your payments. (The lender may eventually take your home to collect the money owed to them.) But if you borrow responsibly – that is, only take out a loan that you can afford to pay off, you can mitigate that risk.

A HELOC

With a Home Equity Line of Credit, or HELOC, you get a line of credit that you can draw on however you want. HELOCs typically give you five to 10 years to make withdrawals, and this flexibility is one reason they may be a better choice for home renovations than home equity loans.

Let’s say you are unsure of the cost of a given project. A HELOC will allow you to overcharge because you can apply for a higher line of credit and not use it all. And at that point, you will only have to repay the amount you actually borrowed from your HELOC. As is the case with home equity loans, you will need to make sure you can repay your HELOC or you risk losing your home.

Cash-out refinancing

With a home equity loan or HELOC, you don’t get a new mortgage. With cash-out refinancing, you do. And while the process of closing a new mortgage is usually longer than finalizing a home equity loan or HELOC, the savings can be worth it.

With withdrawal refinancing, you are borrowing more than your remaining mortgage balance. If you need to renovate, you can use that extra money to cover your renovations. With today’s refinance rates, you could pay much less interest on a refinance with withdrawal than on a home equity loan or HELOC. You just have to be careful not to borrow too much to keep your monthly payments affordable. But to be clear, a cash refinance could help you not only finance your renovations, but also make your remaining mortgage balance less costly to pay off.

Borrowing money to cover home renovations can be a smart move, as the improvements you make could help you get a higher asking price for your home when the time comes to sell it. Just make sure you borrow smart so you don’t pay more interest than you need to.


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