Plan and Finance Your Home Improvement Projects

Paying for home improvements, whether major renovations or unexpected repairs, is one of the biggest challenges homeowners face. In some cases you may plan a renovation for years, but it is not always possible to predict when you will need a new furnace or roof. That is why it is important to have a flexible plan for any eventuality when you take on the responsibility of owning a home.

Here are some strategies that have helped many homeowners keep a snug and leak-free roof over your head.

Make a budget

As a rule of thumb, expect to spend 1% to 4% of your home’s value on maintenance every year. So on a $200,000 home, budget from $2,000 to $8,000 annually. In years when repair bills are lower, you should still be setting aside the same amount, saving up for the day when you need to fix something major. For larger renovations like a kitchen or bathroom remodel, plan ahead. Knowing that a large expense is coming two or three years down the road gives you a chance to divide the price tag into manageable monthly savings goals.

Look for flexible financing

It is not always possible to pay for a major home project with savings alone. If you need to borrow money, financial institutions like Alta One Federal Credit Union offer a variety of home loan options, each suitable for different types of projects.

Home equity loan

These fixed-rate loans allow homeowners to borrow against their equity. Usually, lenders prefer that you retain at least 20% equity in your home. That means your primary mortgage plus your home equity loan should add up to no more than 80% of your home’s value. The lender may require an appraisal.

Home equity line of credit (HELOC)

These loans are best for big projects where you are unsure of the total price tag. You can usually access them with a check or a debit card tied to the account, and you pay interest only on the amount borrowed. Interest rates fluctuate based on market conditions. Home equity loans and HELOCs generally carry low interest rates, like mortgages, and you can deduct the interest paid if you itemize on your taxes.

Personal loan

Unlike home equity loans and HELOCs, personal loans are not secured by your home, so the rates are usually higher, and the interest is generally nondeductible. This may be a good option if you do not have enough equity to tap for your renovation.

Credit cards

Borrowers should avoid using credit cards to pay for big renovations, if possible. That is because interest rates tend to be high, and running up your credit card balance can have a negative effect on your credit score. If you are forced to put a large emergency repair on a credit card, you may be able to get one of the other types of loans listed above to pay down the balance, or transfer the balance onto another card with a lower interest rate to pay it off faster.

Other financing options

If you need funds to pay for necessary upkeep or even improvement projects, you may be able to get a loan backed by the government. The Department of Housing and Urban Development backs Title I loans of up to $25,000 for single-family homes, and some cities and states also offer loans at competitive rates to help owners keep properties in good repair. If your renovations will improve your home’s energy efficiency, check with local utility companies about relevant loans and grants.

Paying for renovations and major repairs is less burdensome if you make a careful plan ahead of time. With a combination of savings and smart financing, you’ll have a better chance of taking good care of your home without skimping on your other financial goals.

Virginia C. McGuire, NerdWallet

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Hidden Tax Breaks

In recent years, the average tax refund has been about $3,000. If you effectively determine and utilize the available tax credits, you may land a sizeable check this spring. Here are several commonly overlooked deductions worth a look.

Home office deduction 
Home offices have many perks: no commutes, casual dress code, etc. Add a tax break to the list of benefits. If you spend the majority of your time conducting business from home, you might be able to deduct some costs using IRS Form 8829. 

Renewable energy tax credit
Have you installed a renewable energy device, such as a solar water-heating system? If so, you might be able to deduct up to 30% of the cost. Form 5695 helps you determine the credit amount, if you qualify. 

Child adoption costs
Expenses related to adopting a child may be written off for 2014. That includes court costs, lawyer fees and traveling expenses such as lodging and meals. The maximum deduction is $13,190 for those who qualify. Refer to Form 8839 for more information.

Job-hunting costs
Travel expenses, fees paid to employment agencies and the cost of printing and mailing your resume can be claimed as miscellaneous itemized deductions on your tax return. Just be aware that you will only qualify for these tax breaks if you were looking for employment within your previous line of work. 

Relocation expenses
Some job relocation costs may be written off from your tax bill with the help of Form 3903. However, the IRS stipulates that your new workplace must be “at least 50 miles farther from your old home than your old job location was from your old home” to qualify. 

Child and dependent care credit
Costs to care for parents is listed as dependents and child day care expenses might qualify for the child and dependent care tax credit. Refer to Form 2441, which stipulates you and your spouse have to file a joint return and both must either have been employed or “actively looking for work” to qualify.

Earned-income credit 
Taxable earnings under a certain dollar amount in 2014 might qualify for the earned income credit. The limit is determined by the number of children, along with your tax filing status. If you are not married, have three or more children and earned less than $46,997, you may qualify. If you are married and have three or more children, the limit jumps to $52,427. For singles with no kids, the limit is $14,590.

Keep in mind that a direct deposit refund helps speed up its delivery. All you need is a checking or savings account at a financial institution such as AltaOne Federal Credit Union.  

We encourage you to take advantage of all available credits and deductions. A large tax refund can go a long way toward helping you to pay down debt and to set up emergency and savings funds. 

Tony Armstrong, NerdWallet

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