By Robyn A. Friedman
City & Shore HOME Issue
Planning a project this spring? Maybe it’s time to upgrade your kitchen or add a new bathroom?
If you’re planning to improve your home, you’re not alone. According to the National Association of Home Builders, spending on residential improvements will grow at a healthy pace over the next two years. After a dip at the beginning of the pandemic last year, remodeling spending is forecast to increase four percent in 2021 and two percent in 2022.
But how should you pay for your upgrades? There are several choices.
Use savings. Paying cash is quick and easy and not a bad way to finance improvements as long as your retirement accounts are funded and you have sufficient cash on hand for emergencies and anticipated expenses. But with interest rates so low these days, borrowing may be a good alternative.
Borrow against your home with a cash-out refinance or home equity line of credit (HELOC). According to property-information firm CoreLogic, the housing market exceeded expectations in 2020, closing out the year with the highest annual home price gain since February 2014. That translates into increased home equity. In fact, CoreLogic reported that in the third quarter of 2020, U.S. homeowners with mortgages saw their equity increase by 10.8 percent year over year, representing a collective equity gain of $1 trillion. For many homeowners, that means they have a cash cushion of equity in their homes that they can tap via a cash-out refinance or home-equity line of credit. “A cash-out refinance makes sense for bigger projects where you need access to a lot of money and want to pay off the work over many years,” says Mari Adam, a certified financial planner in Boca Raton. The good news: You can lock in today’s rock-bottom mortgage rates. The bad: Closing costs can be hefty, Adam says. HELOCs are competitively priced now and definitely worth a look, and banks may waive the closing costs. One thing to note: Rates are variable and can creep up if interest rates increase.
Secure a personal loan. With interest rates low, it might make sense to finance an improvement through a short-term unsecured loan. LightStream, the online lending division of SunTrust, now Truist, offers home-improvement loans starting at 3.99 percent with no fees. Loan amounts can be for $5,000 to $100,000, and terms go up to 144 months. Other lenders have similar programs.
Finance through the contractor. It might be tempting to finance your project through the contractor, but Adam says it’s sometimes hard to tell what they are charging you in hidden finance charges. Ask first if you can get a price discount by paying in cash.
Charge it. Earning points is great, but try to avoid charging a project unless you plan to pay it off as soon as possible. “High interest rates can turn a modest project into a money pit,” Adam says.
Make sure you consult your tax advisor before moving forward, as the rules on deducting borrowing costs for home renovations have changed.