Home renovations: Use Savings or Financing?

Home renovations: Use Savings or Financing?

Making your home a sanctuary can improve your quality of life, but it can come with a high price tag!  Having the right plan in place to pay for the renovations can reduce stress so you can enjoy your new space.

Whether you are moving into a new home that needs some work or looking to refresh your long-time home, renovations can be expensive.  At MainStreet, we encourage you to develop the habit of saving up for home remodeling goals so that you can pay for them.  However, sometimes, financing the project is the way to go!  Let’s look at the options available to you so you can choose the best path for your situation.

Option #1 – Use your savings

This option is attractive because you pay 0% interest on your remodel, which means this is the lowest cost for your project.  If you don’t have enough savings to cover the remodeling costs, then calculate how much you will need for the project and start saving to fund this goal.  You may need to adjust your timeline to give you time to save enough!  But consider that by using your savings, you are giving up the opportunity to invest that money in something which could potentially earn you a higher rate of return than investing in your home. Also, your home is not a liquid investment, so putting your savings into your home reduces your cash on hand.

Option #2 – Home equity line of credit (HELOC)

If you have built up some equity in your home (your home is worth more now than you paid for it) you may be eligible to access a HELOC.  A lender or bank would approve you for an amount that is available to you based on your application.  You then could access cash up to the limit you are approved for, and only pay interest on the amount you use (it is kind of like a limit on a credit card, you only pay interest on the outstanding balance).  Most HELOCs have a variable interest rate, something to look out for in a rising interest rate environment.  Make sure you understand the terms of the HELOC, and we suggest checking for an option to convert your HELOC to a fixed interest rate, so you have options if rates continue to rise.

Option #3 – Cash-out refinance

You can also do a cash-out refinance if you have a mortgage on your home and the value of your home has increased since you bought it.  You would get a new mortgage with a higher principal balance, and this would restart all the terms of your mortgage.  With rising interest rates, the thing to look out for here is that you don’t end up paying a higher rate on your entire mortgage balance.  This option can potentially be very expensive if rates have risen, and your refinance rate is higher than your original mortgage.  On the flip side, if you can reduce your mortgage interest rate and get cash out to finance a renovation this could be the best option!

Option #4 – Home equity loan

Another way to access the equity in your home is with a home equity loan.  This is basically a second mortgage; you receive a lump sum that you will repay over a long time.  Rates on home equity loans are generally higher than mortgage rates.  This option may make sense if you have a larger project, and you have a low rate on your mortgage, so you do not want to do a cash-out refinance.

Option #5 – Personal loan

Perhaps you don’t have any equity in your home to access, but you still want to finance a home improvement project.  Then a personal loan could be the answer. You will need to have good to excellent credit to qualify for the best loan terms, but beware these loans generally have shorter repayment periods and higher interest rates that can lead to high monthly payments.

We here at MainStreet Financial Planning love working with you to help you achieve your goals.  If home renovations are on your wish list, we would be happy to help you create the right plan that makes your home and finances dreamy!


Vida Jatulis
Vida Jatulis

Vida joined our MainStreet Financial Planning team in 2022. She utilizes her life and work experiences to help clients develop an action plan for a vibrant and healthy financial life. Vida is a CERTIFIED FINANCIAL PLANNER™ professional with a Master of Science degree in Investments and over 15 years of experience as a Financial Planner, Wealth Advisor, Pension Consultant, Trust Officer, and Portfolio Manager. In addition, Vida has personal experience with struggling and succeeding to reach milestones such as purchasing a home, putting kids through private school, saving for college, achieving debt free status, saving for retirement, raising a family on a single income and much more.

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