How To Finance Your Home Improvement Project – Cheap Bed Save Money Dressing Your Home

August 16th, 2011 by Matthew Kirkhope

How To Finance Your Home Improvement Project – Cheap Bed Save Money

Too often, renovation projects are long on ambition and short on cash. It doesn’t matter how well planned out your renovation project may be, if you don’t plan your funding properly you will be caught short. There are a few different ways to finance your renovations and this article will step you through your options.

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Finance your home improvement renovations project: cash is king

The first way to pay for your renovations is, of course, cash. Cash is king when it comes to renovations especially for small contractors as they appreciate the instant cash flow and my offer a small discount. The other major advantage of cash is that you don’t have to rely on a bank or lender, either to approve a loan or extend credit. Additionally, this means you are not subject to any kind of charges, interest or fees.

The disadvantages to using cash must be kept in mind too. Handing over a wad of banknotes to a contractor can be risky as there is no paper trail, so if you do insist upon an invoice of some kind. Renovations also have the tendency to become more and more expensive as you progress and decide to embellish the original plan or run into problems. In such cases you can quickly deplete any cash reserves you may have.

Credit cards: cost-effective for home renovations

Using a credit card can be a cost-effective means to pay for your renovations from a fees-and-charges perspective, if you have enough financial discipline. A low-interest rate card is a good option if you are short of liquid-assets but have enough income to support the repayments, or if you are unwilling to jump through the hoops for a loan from a bank. Credit cards also make those funds available to you immediately.

It is possible, at least in theory, to use a no-interest credit card to pay off another no-interest card to effectively have a no-interest loan but be very careful. A good introductory rate on a card may disguise a real beast of an interest rate and hidden fees and charges are not uncommon.

Lines of Credit

A line of credit loan is an alternative that can be described as somewhere between a credit card and a formal loan. You apply for the loan from a bank or credit union and receive access to credit to the value of the loan, but you only pay interest on the money that you actually borrow to spend.

The great advantage of a line of credit is the flexibility. You have access to the funds immediately so you can make as many repayments and withdrawals as you need and the structure of the loan means it can be a relatively cheap way to finance your renovations.

The downside of a line of credit is this very flexibility. If you decide to use a line of credit be aware that the life of the loan is generally shorter than a regular home loan and you may be required to pay the outstanding balance when the loan expires, rather than simply refinancing the agreement. Line of credit loans tend to attract comparatively modest interest rates but be aware of potentially punitive rates.

Home loans for home improvement renovations

There are a couple of different ways you can use the value of your property itself to finance your renovations. These are a popular with both homeowners and banks as the value of the property increases as you are re-investing that capital into the home. There are three general ways you can use a home loan to finance your renovations.

The first is a basic home loan. These are often called ‘Home Improvement’ or ‘Renovation Loans’ but they are basically standard home loans, albeit often for a much smaller amount. These loans are advantageous as you can fix the rate and repayment schedule when you take on the loan so you have a measure of stability and predictability in what you will owe to whom, and when. The danger of this type of loan is that you are accepting a long-term financial obligation using your home as the security.

Alternatively, you can unlock and use some of the value in our home if you have already paid back some of your existing home loan. This is the fabled ‘home equity’ and it can be used in two ways.

Extending your mortgage

The most common way is to simply extend your existing mortgage. This is a good option if you are satisfied with the rate and repayments and have a good record meeting the obligations of the loan. The more equity you have in the home, the more likely you will be to be loaned extra money.

Finally you can refinance your loan to reduce your debt load by reorganising your repayments and interest rates. In this way you can finance your renovations by freeing up some money that would otherwise have been used to service your mortgage. Refinancing your loan is also an excellent way to save money in general if you can secure a better interest rate.

Be aware of penalties and fees

The major disadvantage of extending or refinancing your home loan is that you are effectively pushing around your debt or just adding to it. There may be substantial costs associated with these methods such as exit fees or penalty costs. It may be tempting to refinance your loan in the face of a low introductory rate but be very careful about the rates your loan attracts as it matures. The old saying ‘what the bold print gives the fine print takes away’ should be at the forefront of your mind if you consider this sort of financing. If it sounds too good to be true, it probably is.

Financing your home improvement renovations should fit in with your lifestyle

Whether you decide to use credit, cash or a loan of some kind arranging financing that fits into your lifestyle, financing is an important part of any renovation project. There are few sights as disheartening as a half-finished project with no end in sight. Make sure you avoid leaving yourself short on money by taking the time to carefully and dispassionately assess what you can and can’t afford, and plan accordingly. Good luck!

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