Tanisha A. Sykes

Donald Olhausen Jr., a 34-year-old real estate runabout in San Diego, completed a major home remodeling project on his 2,200-square-foot Mediterranean-style home in 2018.

"We have completely renovated the kitchen and bathrooms, replaced carpets, renewed electrical and sanitary fittings and carried out carpentry work both inside and outside the house," says Olhausen. "We also added lawn and new fences to the front yard to make the curb more attractive."

The project was quite an undertaking, but it was more than worth it for Olhausen and his wife Gabrielle (25). To pay for the renovation, Olhausen, who was the sole owner of the house at the time, borrowed $ 25,000 from his future father. Law.

"It was risky because I had only known him for less than a year and he was getting on my nerves," he says. "It was definitely worth it, because the house looks beautiful." Olhausen has now repaid his father-in-law in full.

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The professional house flipper chose not to refinance his home mortgage or get a home equity line of credit (HELOC) because he wanted to save interest and avoid paying a higher monthly mortgage. He didn't want the credit on his credit report either.

"Even if you don't use all of the money in a HELOC, you have access to it," says Olhausen. "This is why credit bureaus will show you have borrowed this money, which will affect your debt-to-income ratio."

In its US Houzz & Home 2021 study, Houzz found that home renovations rose 15% over the past year to an average of $ 15,000, with kitchens, exteriors, and home offices receiving the most attention.

Before you get into the excitement of choosing faucets and paint colors, take the time to research your financing options. Here are five of the most common home improvement payment methods.

cashbox

When you pay in cash, you can afford your purchases without having to worry about paying back high-yield debt. If you have a large amount of money in a low-interest savings account, you'd better use it. "With inflation and the rising cost of goods, the purchasing power of bank balances continues to decline over time," said Samuel Eberts, junior partner and financial advisor at Dugan Brown, a federal retirement company in Dublin, Ohio. He recommends saving at least six months in emergency expenses. "In addition, the money could be used for home renovations instead of sitting idly in the bank," says Eberts.

Credit cards

Gabrielle and Donald Olhausen Jr. remodeled their kitchens and bathrooms, replaced carpets, replaced electrical and plumbing fixtures, did interior and exterior carpentry work, and added turf and new fences for a major home renovation in 2018.

Homeowner Olhausen has also posted $ 5,000 of renovation expenses to a credit card.

"That was my only option," says Olhausen. "Normally I would advise against it, because the interest costs you alive." Financing a home renovation project with a credit card is a double-edged sword, says Eberts. While many cards don't offer interest for a period of time, Eberts recommends paying off the debt before this introductory period ends. Otherwise, you will be charged the regular APR on the amount that has not yet been paid.

Home loan

A home equity loan, which is a type of loan that allows you to borrow against the equity in your home, can be a smart move given the low interest rates in the market. In early August 2021, the average home equity interest rate was 5.35% APR, according to Bankrate.com.

"Mortgage rates are at record lows, so for a homeowner sitting on a pile of equity, paying out refinance is likely the lowest cost of borrowing," said Greg McBride, senior financial analyst at Bankrate.com. "Many homeowners benefit from a refinance anyway, and withdrawing cash could be the ticket to pay for major repairs or renovations at this point."

According to Bankrate.com, you typically need 15 to 20% equity in your home to qualify for this type of loan. Remember that with a home loan you will take on more debt and use your home as collateral. Eberts adds, "Essentially, if you can't afford the monthly payments, your home is at stake." You will also have to pay closing costs and fees. Hence, make sure that you understand all of the loan requirements.

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HELOCs

A HELOC is a line of credit secured by your home that gives you a revolving line of credit for large renovation projects. The HELOC offers a lot of flexibility in terms of how you borrow and repay the money, says McBride. When a project has to be completed in phases, you can borrow the money as needed and make minimal interest payments when you are short of money, "he says.

However, consumers should also be aware of the risks associated with this financial product.

Since HELOCS uses your property as collateral, there is a risk of foreclosure if you default on payments. In addition, these loans act as a second mortgage payment; Therefore, you will make two mortgage payments every month. In addition, the interest on these loans is variable. "

"A cash-out refinancing offers the security of a fixed rate and a monthly payment," says McBride. "But a HELOC has a variable interest rate that would rise with the interest rates and after 10 years would switch to a repayment phase with higher monthly payments."

HUD Title I loan

Title I loans are a great option for homeowners with modest incomes. For a single family home, the maximum loan amount is $ 25,000 and varies depending on the Department of Housing and Urban Development requirements for other types of homes. "They're not intended for luxurious or fancy upgrades like installing a pool," says Eberts. "HUD I title loans should be used to make a home more livable."

For example, some homeowners apply for these loans to improve the accessibility of a home for people with disabilities, which may include adding a ramp or widening doors, Eberts explains.

These loans are made by private lenders but are government sponsored. Most lenders require the borrower to use their home as collateral for loan amounts over $ 7,500. See Hud.gov for more information.

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source https://seapointrealtors.com/2021/08/11/to-pay-with-credit-cash-heloc-or-other/

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