You browse Houzz, Instagram, and other home-design sites and blogs, liking and saving bright new kitchens, spa-like baths, or lush outdoor living spaces — but get stumped when it comes to financing your remodeling dreams. It's a dream within reach — whether you've been in your home for years or just bought a home that needs work —and we're here to help you sort out your options.
All by Yourself
If you've been saving diligently for some time, or maybe pocketed a nice payout from the sale of your previous home, you're in the driver's seat with cash on hand. But look carefully at your projected costs and budget accordingly.
It's not uncommon for a project to get a little more expensive after you start — you may find hidden damage or splurge on more expensive finishes and materials. Don't spend your entire nest egg — keep some money in the bank.
With a Little Help From Your Lender
If you've been in your home for a while, a home equity loan (HEL) or a home equity line of credit (HELOC) are smart ways to use the value of your home to increase it. Though the two terms are commonly used interchangeably, they are different.
The simpler of the two is the HEL, which is usually a loan with a fixed term of time and a fixed interest rate. The amount of the loan is based on the equity you have in your home. The borrower gets a lump sum and pays it off in regular monthly payments. It’s really a second mortgage. It's also an increasingly rare offering from lenders, because the HEL exposes them to more risk if interest rates rise.
The HELOC is the most popular type of equity-based financing. With the HELOC, the borrower assumes the risk of rising rates. It's a revolving credit line using the equity in your home as collateral, and borrowers use it like a credit card. HELOCs come with variable interest rates, protecting the lender and putting more risk on the borrower if interest rates spike.
The HELOC comes in a lump sum that you can access for limited time, the draw period, and you'll pay interest on the amount you take out. After the draw period, the loan converts to a regular installment loan, requiring you to pay the principal and interest in monthly payments.
Both types of loans will still be eligible for tax deductions in 2018, says the Internal Revenue Service.
Another Way to Cash in
For homeowners with a good deal of equity, a cash-out refinance is a possibility, though make sure you're not trading in a mortgage with a much lower interest rate. It allows you to refinance your home for more than you owe on the current mortgage, and the difference goes to you to use as you wish. Your monthly payments will rise, and the clock resets on the loan — so if you had 5 years left on your mortgage, refinancing will set the term of the loan to 15 or 30 years.
Financial experts advise using your equity to reinvest in your home is a sound use of a cash-out refi, because you'll be improving it and raising its value. Cash-out refis were abused during the early 2000s, and led to foreclosures when borrowers couldn't pay their new, higher mortgage payments.
So you've got some places to start, but as always, check with your financial adviser and a tax expert to make sure you're making the right moves. But with the right money plan, you can finance the remodel of your dreams.