Home Improvement Ideas
How to Finance a Home Renovation Project with Little Equity
Q: We’ve decided to remodel our kitchen later this year. I’m sure that this will lead to doing some other work around the house, and possibly adding on a deck as well.
I talked to the real estate agent who sold us our house and she said that if we put in a first-class kitchen, installed a new deck, and redid the powder room on the first floor, our house would be worth significantly more than the amount we would spend to do the work.
We estimate the work will cost around $125,000 but we don’t have enough equity in the house to cover that entire cost. What options do we have?
A:There are several ways to finance a home improvement project.
For small to medium-sized projects, you can tap into your home equity with a home equity loan or home equity line of credit.
You can also pay off all off all of the existing loans and your home and take out a new, larger loan. This is commonly referred to as a “cash-out refinance.” You may have to pay a higher interest rate than your original loan, but it may be less than having two loans and you would have the cash on hand for the renovation.
You indicated that you don’t have enough equity in the home to cover the cost of all the improvements. In that case, you have several choices.
First, you can go to a home improvement store like Home Depot and Lowe’s. These stores frequently offer financing on purchases from their stores with little or no interest to pay for up to one year. While this kind of a loan won’t cover all of your construction expenses, and it isn’t designed to be paid off over a lifetime, these loans do offer short-term solutions for small-to-medium sized projects.
Another option is to find a lender willing to give you a construction loan. Construction loans are short-term loans that cover the cost of your home improvement project. These loans generally have a floating interest rate, meaning as interest rates go up, you pay more. However, some lenders will give you the right to convert the construction loan into a permanent loan when the work is finished.
While a construction loan might work, watch out for the fees. Construction loans can carry higher than normal charges and may have additional requirements and paperwork that you will not have seen in other loans. To get the construction loan approved, you will have to prove to the lender what the value of the home will be once the work is completed. The value must be high enough to allow the bank to give you the loan.
But if you can handle the extra baggage, a construction loan might be a flexible alternative.
Lastly, if you find that none of these options will work, consider tackling one home improvement project at a time, as your budget allows.
You can do the kitchen this year and then stagger the rest of the work over the next few years. By doing one big project now, like your kitchen, you’ll hopefully build in additional equity that you can tape for the smaller projects over time.