With so many financing options available, it can be tough deciding what the best option is when paying for home remodeling or home renovation projects. To help you make the best financial decision for your family, here’s a breakdown of the most common options ranked from best to worst. The following information is provided as part of our ongoing home remodeling blog series focusing on personal finance.
Without question cash is the best way to pay for home remodeling projects. If you have enough cash on hand to pay for your home improvement projects you can greatly minimize risk and costly interest fees associated with other forms of payment. As always, it is not wise to deplete all your cash savings when paying for home remodeling projects. Make sure you maintain an appropriate “emergency fund” in your savings account.
Home Equity Loan/HELOC:
Another popular financing option for home remodeling projects is the use of a home equity loan or home equity line of credit (HELOC). Both options allow you to use equity in your home to pay for the home remodeling or renovation projects. While I generally discourage people from assuming debt for cosmetic home improvement projects, a home equity loan is probably the best of the remaining financing options. Home equity interest rates are very low and in many cases are tax deductible.
Home Improvement/Personal Loan:
Home improvement loans or personal loans, are another options when it comes to paying for home improvement projects. Unfortunately, home improvement loans and personal loans have much higher interest rates than regular home equity and HELOC loans. The interest you pay is probably not tax deductible either.
When it comes to financing a home renovation project, credit cards can be an attractive option. Unfortunately, credit card interest rates can be ridiculously high. If you think it will take a few years to pay off the home remodeling project paid for with a credit card you could end up paying 50% or more in interest charges over the original cost of the renovation project.
Another home remodeling finance option people often use is borrowing money from their 401k in the form of a 401K loan. 401K loans are very easy to get (too easy in my opinion) and you actually end up paying the interest back to yourself which seems like a good deal. The danger with using a 401K loan to pay for home remodeling or renovation projects (or anything else for that matter) is you’re assuming a huge risk in the event you lose your job and are unable to pay back the loan immediately. The loan proceeds will be considered a withdrawal by the IRS and you may be subject to a 10% penalty in addition regular income tax you’ll be required to pay on the loan.
Cashing Out 401k or IRA Accounts:
Another option for financing a home improvement project is taking an early withdrawal from a 401k or IRA account. Unless your home needs immediate repairs that otherwise jeapordize the safety of your family (and you have no other means of affecting the repairs), I would discourage anyone from withdrawing money from their 401k or IRA to pay for a home remodeling project.
I hope this helps clear up an questions you may have had in regards to the best way to pay for home remodeling projects.
Too Much Debt? Download our free Trees Full of Money Debt Snowball Calculator and see how quickly you can pay off your debt.