You’d like to give part of your home a makeover, but you don’t have enough money laying around to pay for it up front.
Join the club.
The question of whether or not to take on debt to pay for a renovation is a question whose answer is drowning in gray area. Potential outcomes range from a wise investment that pays for itself down the line, to losing your home to foreclosure – and a whole lot of potential good and bad in between.
Questions to Ask Yourself
First, why are you renovating? For your own comfort? To meet the standards of you condominium association? Are you planning to sell? Will you build an addition that allows you to rent?
The answers to these questions determine whether you can realistically expect the home to pay you back for what you put in. If you’re planning to sell in the near future, for example, making over the kitchen or the bathroom can increase the home’s value and help you fetch a higher asking price. Renovating to rent out a room can of course recover expenses through the collection of rent. The article “Increase Your Home’s Value with New Roofing” points out that springing for roof repairs can beautify your exterior, increase value and save you money on energy costs all at the same time.
Where is the Loan Coming From?
There are many ways to borrow money. Two common ways involve borrowing against the equity in your home: home equity loans and home equity lines of credit (HELOCs). A home equity loan is a one-time lump sum payment that generally comes with higher rate because it offers the security of fixed-rate interest. A HELOC gives a homeowner a line of credit that they can access in small amounts over time for longterm renovations with recurring expenses. The benefits of HELOCs are tantalizingly low initial rates and the fact that no interest is charged until the borrower makes a withdrawal. The downside is that the rates can change at any time and if your credit or income changes, you can be cut off.
Both options put the home up as security, so a default could lead to foreclosure.
Other Pros and Cons
The biggest benefit of borrowing to renovate is obvious: you get money that you wouldn’t otherwise be able to spend on a project you want to complete. The most obvious drawback is that you assume debt that you will be responsible for paying back. There are other factors, however, beyond the obvious. Home renovation loans often come with lower rates and give borrowers much more time to repay. Interest paid on certain renovation loans are often tax deductible. The bad news is that not all lenders offer special renovation loans, and if you don’t have enough equity in your home, you may have to take out a less favorable personal loan, which are harder to get and usually cost more.
The decision to take out a loan to renovate your home must be based on the realities of your situation, your income and the amount of debt you currently hold. Don’t assume a renovation will give you a golden ticket to flip your house for an enormous profit, like they do on the home improvement shows on TV. If you can’t afford to pay back the loan with your current income alone, continue saving.