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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