Home improvement projects—whether you hire a pro or DIY—do cost a pretty penny, so most of us have to take out some sort of loan to pay for them. You’ve probably received “you’ve been approved for a personal loan!” letters in the mail or have been told you can refinance your mortgage and take money out for whatever you want. As with other major financial decisions, however, it’s really worth the time to understand your different choices so you don’t screw yourself in the long run. Let’s take a look.
For projects between $15,000 and $50,000, Credit Karma says personal or unsecured loans are a good fit. That’s because these types of loans are easy to apply for, don’t require any collateral (your home is not in jeopardy if you default), and they tend to offer higher loan amounts than credit cards do.
On the flip side, however, interest rates tend to be higher on personal and unsecured loans than they are on home equity or home equity line of credit (HELOC) loans. For example, a $50,000 unsecured personal loan at Wells Fargo has a 7.244% to 9.247% APR, depending on the term of your loan (36 months to 60 months)—which is a great deal more than the 4.06% APR you can get on a home equity loan, according to the latest average posted on Bankrate.
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“Not only is it the perfect height to be a substitute standing desk, there’s also enough counter space for any extra papers,” she says. “The change in location helps break me out of any problems that I may have run into.”
The Joint Center analysis also notes the influence of home equity and values on owners’ ability to afford upgrades. The median home price in the 25 biggest metro areas in 2015 was $270,000 – more than one-third higher than the national average – and home improvement spending there accounted for about 45% of the national total in 2015. Spending per owner in those metros was $3,400, about 15% higher than the 2015 national average.
Again, terms vary, but many HELOCs offer 5 to 10 years for you to access the credit line, during which you pay interest on what you borrow, and then after that draw down period, 15 or so years to pay it back in full.
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Homeowners’ willingness to tap equity to make repairs and upgrades has helped retailers like Home Depot HD, -0.40% . “Since 2011, home equity is up 108%,” CFO Carol Tomé told analysts on an earnings call in February. “On average, that equates to $50,000 per household. And we believe that’s contributing – as people use the equity of their house to spend back into their house, we believe that’s contributing to our growth.”
What’s more, if homes are changing hands more slowly than in the past, that remodeling incentive dwindles. Sales stagnated during the housing downturn and recession, and have only slowly returned to more-normal levels.
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Finally, there’s the question of concentration. Being where the action is frees the trapped worker. But a central location—with amped-up noise and activity—can also present challenges for even the most agile multitasker. For this reason, while Duncan has a favorite comfy chair in the media room where she can power through the bulk of her work with the TV on, she heads to the TV-free living room when it’s crunch time.
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People who work from home may also be tempted to take their home office tax deduction. The good news is, the IRS does not require a home office to be its own room; it can just be a corner you’ve carved out of a bigger space.
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Given the ergonomic perils of working from home, people who do so should be particularly aware of any aches and pains that can develop. If you’re working in an armchair, use a footstool to elevate your legs and ease pressure in your lower back. And in bed, use a TV tray to support your laptop, like Jessalyn Duncan, vice president of Benediction Web Consulting in Houston. A keyboard that’s too high can put stress on your wrists; use the tray to keep your laptop on the same level as your forearms.
On the downside, however, home equity loans can also be pricey, with transaction fees and closing costs similar to a primary mortgage. There might also be a pre-payment penalty if you pay off the loan early.
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HELOCs are adjustable rate mortgages, however, so the rate can fluctuate and end up much higher than the rate you’d get on a fixed home equity loan. That makes it much more risky. On the other hand, there are usually no closing costs on HELOCs.
But here’s the bad news: Your “office” does need to be used exclusively for business. So, your kitchen table where you eat, the bed where you sleep, or living room couch where you watch TV won’t count. But hey, if that’s where you work best, then it will obviously pay off in the long run!
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Because terms and rates differ greatly between these niche loan products, it’s also harder to understand just what you’re signing up for. Steer clear of shady offers, especially payday loans. You should compare the terms, APR (annual percentage rate), and other costs of each loan to see which one makes the most sense. The Mortgage Professor offers many calculators for that tricky task.
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Home equity loans are a second mortgage on your home. They’re usually a fixed interest rate for the life of the loan, and you get the money in one lump sum. Terms vary, but many home equity loans have you pay back the principle and interest within 15 years with monthly payment plans. This might be the best option if you need a set amount of money for something important and have enough room in your budget to make the payments, of course.
You could also do a combination of cash and one of the financing options below to reduce the amount you pay in interest. Also note that by “cash” we mean you pay for the project outright rather than get a loan for it that you pay off slowly. That could mean charging the project to your credit card so you get the rewards for it but then paying your credit card in full when it’s due, avoiding the interest.
Pros: Easy to qualify for, higher loan amounts than credit card offers, usually no closing costs or loan processing fees, longer payback time period (several years versus a year or two for credit cards)
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Romem compared sales data and building permits in several metros and found that remodeling work jumped in the months immediately following a home sale – again, more in metros where the housing stock is older than in areas where homes are likely to be newer.
That idea is echoed in a separate analysis by BuildZoom, an online marketplace that connects contractors to consumers. BuildZoom Chief Economist Issi Romem agrees that there is likely upside for remodeling activity – because so much has been deferred over the past few years.
As you can see, the types of financing for home improvements vary quite a bit, and which one would be best for you depends on your situation. Bankrate has a calculator to help you decide between a home equity loan or a home equity line of credit.
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However, a cash-out refinance can be costly in the long run. In addition to possibly high closing costs, you’ll pay a higher APR than if you simply refinanced without getting cash out. Also, you’ll owe more on your mortgage again, which is not fun at all. If you’re 10 years into your 30-year fixed mortgage and refinance into a bigger 30-year loan, the clock restarts. Instead of 20 years left to pay, payments are now stretched over 30 years.