People are spending a lot more time at home. Whether it’s because of a stay-at-home edict or just choosing to work remotely instead of heading toward the office, many are choosing the stay-at-home model and some employers have found the stay-home can be an option for the employee going forward. And spending more time at home might also lead to thinking of a few household projects. Is the kitchen looking a little dated after all? How about some new countertops and upgraded appliances? Is the living room carpet looking a bit threadbare? If so, you’ll need to decide how to pay for those improvements.
The obvious way is to pay cash. It’s quick, interest-free and you can tap into a checking or savings account pretty much anytime you need it. You get a bid, decide whether or not to move forward and write a check. On the flip-side however, pulling money out of an account can put a dent in the balance and in any interest-bearing account, money out no longer pays interest. The bigger the project, the more that’s pulled out. And, once those funds are used to upgrade the kitchen, the asset is no longer liquid, it’s in the cabinets, appliances and flooring.
You can get a home improvement loan to pay for a remodel. With a home improvement loan, your loan goes directly toward the improvements. Depending upon the size of the home improvement loan, the funds might be delivered straight to your bank account at your settlement or if you have a larger project in mind, the bank might deliver the funds in stages as the work is completed.
Say for example you’d like to add on a third bedroom instead of selling your home and buying an existing three bedroom house. This would be considered a major remodel while at the same time increasing the value of your home by adding a third bedroom. This entails hiring an architect and a builder and paying for inspections and final appraisal as part of the process. With such a loan, it is phased in like most any other construction loan. The bank reviews your plans and specs, comes to an appraised value based upon what the final three bedroom project would be worth once complete. When the third bedroom is added on and finished out, one final inspection is performed to confirm completion. At the end of the project, the construction loan becomes due and a permanent mortgage is needed to replace the temporary construction funds.
A home equity loan can also be a solution. A home equity loan is a loan taken out with some of the equity in your home as collateral. There are two basic types of equity loans, a standard equity loan and a home equity line of credit, or HELOC. A standard equity loan is issued as a lump sum payment. a HELOC acts much like a credit card. You’re issued a line of credit based upon the as-completed value. If you want to pull out $10,000 for new appliances, you can do so but you also have the option of paying some or all of that $10,000 back based upon the terms of the loan, freeing up the equity to be used once again at some point in the future.
Another option is to utilize a cash-out refinance. During the process of refinancing an existing loan, homeowners may elect to pull out a little extra after paying off the outstanding principal balance and closing costs. If the loan balance is $200,000 and closing costs are $3,000, the new loan could also include some extra money in the bank account by tapping into the available equity in the home. However, exploring a cash-out refinance should only make sense if a non-cash out refinance lowers the interest rate on a low, changing loan terms, avoiding a balloon payment on its own, then pulling a little extra out in the form of cash might be an option for you.
All of these financing options have their advantages. Your loan officer can break down all the options, compare monthly payments, costs, etc. and help you choose the right financing tool for your individual project.
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