How to pay for a renovation without using your home equity

With tens of millions Americans stuck at home during the pandemic, a homeowner’s wandering eye increasingly turns to home renovation projects. In many cases, that means highly expensive home renovation projects.

According to a recent survey by Porch.com, 76% of U.S. homeowners completed at least one home improvement project since the start of the COVID pandemic. Additionally, 78% plan to undertake at least one home improvement project in the next 12 months. Of the home renovation projects on the “active” list, home exteriors, bathroom overhauls, and making a home environmentally friendly are high on the Porch.com list.

Of course, any home renovation project comes with a price tag. According to Porch.com, American homeowners spent a median amount of $17,140 on improving their homes since the pandemic began, with credit cards, home loans and government stimulus payments all in financial play.

HOME EQUITY LOAN VS. HELOC: WHICH IS BETTER?

Home renovation payment options

Before signing off on any home equity loans, homeowners may want to explore other forms of home restoration project financing – there may be better deals out there.

1. Personal loans
2. Government loans
3. Work with a home services company
4. Do the job yourself (to some degree)

1. Personal loans

“Most lenders promise to fund a loan within a week, while home equity loans can involve time-consuming underwriting and appraisal processes,” said Ana-Maria Sanders, a financial analyst at OpenCashAdvance.com. Personal loan rates may be higher than rates tied to home equity loans or lines of credit, but they’re lower than some credit cards and they’re generally paid off more quickly.”

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2. Government loans

Another loan model homeowners can consider are government loans.

“The U.S. government offers Title 1 loans for qualified borrowers, including those homeowners buying appliances and who are making your home more accessible or improving its energy efficiency,” Sanders said. “Homeowners can borrow up to $25,000 for a single-family home, and repayment terms are typically between 12 and 20 years.”

3. Work with a home services company

Many home supply companies are offering interest-free financing during this recession.

“I receive at least one coupon per month from a big-box hardware store offering me 10% off and free financing if I work with them on a home renovation issue,” said John Kilpatrick, managing director at Greenfield Advisors in Seattle and author of the book Real Estate Valuation and Strategy. “Be careful, though. Don't get suckered into high-interest-rate offers by some contractors, who are making money on the back-end by promoting a finance company.”

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4. Do the job yourself – to some degree

Kilpatrick advises injecting some sweat equity into a home improvement project.

“That’s doable with jobs like painting, refinishing the floor, installing new cabinet doors or drawers, installing new light fixtures, upgrading plumbing fixtures, or landscaping,” he advised. “Many home improvement stores offer classes and consulting for sweat-equity households.”

Shop around for competing bids. If you have very light electrical or plumbing work, bid it out. “For example, you may be able to find licensed part-time folks who are trying to make a little money on the side,” Kilpatrick said.

HOW TO USE A HOME EQUITY LOAN FOR DEBT CONSOLIDATION

Should you use home equity to pay for remodeling?

Historically, homeowners haven’t relied on personal savings to cover the costs of a home restoration project. Data from Discover shows that only 25% of homeowners have enough cash savings on hand to complete a major home improvement job. That’s where a home equity loan comes into play.

.HOW MUCH EQUITY DO YOU NEED TO REFINANCE YOUR MORTGAGE?

A home equity loan enables homeowners to dip into the existing equity in their properties, in the form of a home equity loan, to fund a home renovation project. Home equity loan rates are down in 2020 (US Bank has loan rates as low as 3.40%, for example) and the borrower typically doesn’t have to pay the money back for anywhere from 10-to-30 years.

Sounds like a no-brainer, right? Not so fast, financial experts say.

“There are two problems with tapping home equity for renovation projects,” said Brian Davis, a real estate investor and founder of Spark Rental, a real estate investment advisory platform. “First, it's an expensive way to borrow. Closing costs add thousands of dollars to the cost of the loan, as lenders require a title search and lien against the property.”

“Plus, lenders try to misdirect borrowers away from focusing on them by rolling closing costs into the loan, but they make home equity loans and home equity lines of credit (HELOC’s) extremely expensive ways to borrow despite lower interest rates than other loan types.”

Homeowners looking to leverage a home equity loan to cover a restoration project should compare the total life of loan cost, including both interest and all fees.

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“They should also keep in mind that if they lean on credit cards, they won't pay cash advance fees when paying for materials, and some contractors accept credit cards nowadays,” Davis said.

Homeowners who take out a home equity loan also tend to forget about the loan payments and pay the minimum each month, allowing it to cost them money for many years to come. “At least, those who pay with a personal loan or credit card tend to pay off the debt as quickly as possible to avoid unnecessary interest, leaving them debt-free again in a few months or years,” he added.