How to Pay for Home Renovations
Whether you’re dreaming of a chef’s kitchen, modern bathroom, or home addition, you’re not alone. Many homeowners have been remodeling instead of moving during a tight real estate market. Whether you’re looking for renovation projects that will add lasting value to your house or just trying to change things up to work better for you, you’re probably wondering about the best way to pay for home improvements.
Benefits of Home Renovations
From making your home more functional and comfortable, to adding value with attractive improvements, there are a variety of benefits to renovating your home.
- Increases the value of your home and property
- Improves the functionality of the home
- Can help improve energy efficiency and lower the cost of monthly utility bills
- Enhance the style and comfort of the home
- Optimize the space in your home and make best use of square footage
Saving for Home Improvements
Before you apply for a home renovation loan, you may want to try and save up at least part of the total cost. Savings will also come in handy in the event that something goes wrong during construction, or the total ends up more expensive than estimated. Your options for saving for home improvements include:
Share Accounts: This is a basic interest-earning savings account. At DNCU, we call them share accounts and you earn “dividends,” our word for interest.
Share Certificates: Also known as a Certificate of Deposit, Share Certificates provide a higher rate of return in exchange for committing to a pre-determined term. This option can also be good for people worried about spending their savings before the remodeling project starts. Since you can’t access your funds in a Certificate without paying an early withdrawal fee, it’s easier to leave it alone and let it grow.
Money Market: Earn interest on your savings and enjoy the convenience of writing checks from your Money Market account when it’s time to pay contractors.
Financing Options for Home Improvements
In New Mexico, the average cost of a kitchen remodel ranges from $12,000 to $49,000 depending on the size of the room, the scope of the project, and the types of finishes and appliances you choose. A bathroom remodel can cost $8,000 and up depending on the same factors. Because a home renovation is a major cost, many homeowners need to borrow at least some of the total cost. Your options for home improvement financing include:
Home Equity Loan
Allows you to borrow against the equity of your home, giving you access to cash to use for home renovation projects. Your home equity is the difference between your current mortgage balance and the market value of your home.
A Home Equity Loan is a term loan that is usually paid out in one lump sum that you can repay over a number of years in fixed monthly payments, just like any other loan. This option is best for homeowners who need the funds upfront, know how much they need for their projects, and have the ability to make the monthly payments every month on the loan.
A Home Equity Loan is a great option when you have one big renovation project planned and know what the total cost will be.
Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit that works similarly to a credit card (except with a much lower interest rate!). Like a Home Equity Loan, a HELOC is secured by the equity in your home. You only borrow what you need to, when you need to, and only pay interest on the funds that you borrow. This option is best for homeowners with good credit and sufficient home equity but who may not be sure of the exact budget for their home renovations. A HELOC is also great for multiple smaller home improvement projects.
Home Improvement Loan
This is a type of personal loan specifically intended for home renovation projects. Home improvement loans are not secured by the equity in your home, so they may have higher interest rates and lower maximums than a Home Equity Loan or HELOC. However, a home improvement loan can be a great option for homeowners who don’t have enough equity in their homes or who don’t want to borrow against their equity. Use a home improvement loan for smaller projects and upgrades, such as winterizing your home.
Cash-Out Refinance
This is a type of mortgage refinance, which replaces your current home loan with a new mortgage. People most commonly refinance to take advantage of falling interest rates, switch mortgage loan programs, or change their loan term. A cash-out refinance can achieve any of those goals, as well as converting some of your equity to cash.
Because you’re taking out a new mortgage loan, you’ll have to pay closing costs again. So, think about how long you plan to stay in your home. If you plan to move in the next few years, a mortgage refinance may not be your best option.
Cash-out refinances are great for large renovation projects or a variety of smaller-to-medium projects
Let us help you pay for your home renovation in New Mexico!
Tap into your home’s equity to cover financing for home improvement projects–apply for a Home Equity Loan or HELOC online today! We also offer TruStage Home Insurance to help you protect your home and the investments you make in it.
At DNCU, our mortgage lenders live and work in your New Mexico communities. You can rely on us for sound financial advice and local expertise. Apply online for a home equity loan, HELOC, or mortgage refinance, or contact one of our home lenders for a free consultation. Not a DNCU member already? Make the switch today!
Disclaimer: This article is for informational purposes only. For advice regarding your specific financial situation, please consult a financial planner or a trusted financial professional.