Many homeowners recognize that improving and maintaining a property makes a home more livable for its inhabitants and more attractive to prospective buyers when the time comes to erect a "For Sale" sign in the front yard.
But a well-maintained home also provides additional benefits. According to the United States Department of Housing and Urban Development, home improvements not only raise the values of individual homes, but they tend to raise neighborhood standards as well. Home improvements can create jobs and help local communities flourish economically.
Maintaining a home can be a costly undertaking. Home improvement projects can be expensive whether homeowners hire professionals or tackle renovation projects on their own. The following are a handful of options homeowners can consider as they look for ways to finance renovation projects.
• Paying outright: Paying for the renovations upfront and in full is perhaps the simplest way to finance a project. Homeowners who have the cash to pay for renovations outright won't have to worry about interest rates or balloon payments.
• Mortgage refinancing: Some homeowners tap into their home equity to cover home remodeling projects. Refinancing a mortgage means paying off the debt owed and starting over with a completely new loan. Refinancing comes with various fees and can cost between 3 and 6 percent of the loan's principal.
• Home equity loans and lines of credit: Both of these options are commonly referred to as second mortgages. When homeowners apply for home equity loans or lines of credit, they are borrowing against the equity value in their homes. A home equity loan is a term, or closed-end, loan. It is a one-time sum that will be paid off over a set amount of time with a fixed interest rate and the same payment each month. This is a one-time loan from which a person cannot borrow further. A home equity line of credit, or HELOC, is like having a credit card. It's possible to borrow a certain amount for the life of the loan, which is a set time specified by the lender. During this time, homeowners can withdraw money as it is needed up to the value of the line of credit. HELOCs typically have a variable interest rate that fluctuates and payments can vary depending on the amount of money borrowed and the current interest rates.
• Title I property loan: Residents of the United States with limited equity in their homes may qualify for an FHA Title I loan. Banks and other lenders are qualified to make these loans from their own funds, and the FHA will insure the lender against a possible loss. Title I loans can be used for any improvements that will make a home more useful and livable. They cannot be used for renovations deemed luxury expenses.
• Borrow against retirement funds: Some people opt to borrow against a 401(k) plan, IRA or another retirement fund. If the retirement plan allows a loan without penalty, it can be another way to secure funds. Because it is the homeowner's money, there will be no credit check required and less delay in getting the funds. Borrowers should keep in mind that taking a loan against a retirement account will usually result in a lower retirement balance than it would have been had they not borrowed money from the account — even after the funds have been repaid.
• Credit cards: Credit cards are an option when improvements are not expensive. Individuals with excellent credit ratings may qualify for cards with a no-interest introductory periods of several months or more. These cards can be a good way to pay off moderate improvements in a short amount of time.
Many home renovation projects require homeowners to develop a home improvement budget. Homeowners are urged to explore all options and find the least costly loan method and the one that will present the best possibility for avoiding debt.