NerdWallet: 4 ways to pay for a remodel without using your home equity

Erin Nelsen’s house could use more walls.

The certified financial planner works outside the home from an office in Cypress, California. But her husband, Shawn, works from a makeshift home office in their kitchen. From there, he hears his kids attending online school through an opening to the adjacent dining room.

To accommodate his new working conditions, Shawn taped a “sound-insulating foam barrier” in the opening, Nelsen says.

Other homeowners have used their time sheltering in place to make more permanent changes. About one-third (34%) of homeowners who have done improvements since March 1 started sooner than planned because they had more free time at home during COVID-19 social distancing measures. That’s according to a NerdWallet survey conducted online by The Harris Poll among more than 800 homeowners who have done home improvements since March 1.

Seven percent of those renovating homeowners used a home-equity loan or line of credit to pay for the update.

Equity can be a low-cost resource to finance your remodel, but it takes time to build up, which may make it difficult to start a project earlier than planned. Homeowners looking for faster options can consider the following non-equity ways to pay for a remodel.

Use your own money

The most common way people have been paying for their renovations is with their own money, according to the survey.

Roughly one-third (34%) of homeowners who have made home improvements since March 1 paid for their renovations with available funds from their checking accounts or current paychecks. One quarter (25%) used money they had specifically saved for the project.

Using your savings lets you cover renovations and repairs interest-free, says New Jersey-based certified financial planner James Kinney.

That means if you don’t already have the funds to remodel your kitchen, “my approach would be for you to sit and look at the kitchen a little longer,” he says.

Atlanta-area CFP Jovan Johnson says he sets money aside each month to someday pay for a remodel or repair.

“When I get to that point of wanting to do a home improvement project, I already have ‘X’ dollars I can pull from before I even have to consider home equity or personal loans,” he says.

Charge a credit card

Credit cards typically have interest rates between 12% and 23%, making them among your most expensive financing options, but 29% of homeowners who have done home improvement projects since March 1 say they put their renovations on plastic.

If you choose credit cards to pay for the remodel, make them work for you. For example, some cards can give big rewards on certain purchases, including home improvement expenses. Stores may also offer cash back, which could add up if you’re planning to buy most of your supplies from the same store.

Borrowers with good or excellent credit (690 or higher FICO) are the most likely to qualify for these cards.

If you already have money saved for the renovation, but still want to reap credit card rewards, Johnson recommends using rewards cards to pay for the remodel and then paying them off in full each month. This way, you can build credit and get cash back without paying the card’s interest rate.

See: How to avoid common and costly home renovation mistakes

You can use a credit card beyond what you have saved, but try to pay the full balance to avoid letting the interest outweigh the rewards.

For small projects — say, a few thousand dollars — consider using a 0% APR credit card, says San Diego-based CFP Jamie Lima. If you can pay the project off during the interest-free introductory period, typically 12 to 18 months, you can upgrade your credit and your home at the same time.

“You benefit from getting the project done, you’re getting to build credit for yourself, you’re borrowing at a 0% interest rate,” he says. “It’s a win-win all the way.”

Get a personal loan

Unsecured personal loans are a less common choice for renovations — 8% of homeowners who have made improvements since March 1 used one, according to the survey. But they can be a way for homeowners to start their project quickly.

Most lenders say they can fund a loan within a week, while home-equity loans can involve time-consuming underwriting and appraisal processes.

Personal loan rates are between 6% and 36%, which is higher than home-equity loans or lines of credit, but lower than some credit cards. Borrowers with standout credit are more likely to qualify for lower rates on a personal loan, Johnson says.

As your loan amount increases, your APR will inflate your monthly payment, so he recommends keeping the project’s cost around $20,000 or less.

Personal loans can also have short repayment periods around two to five years, so you’ll likely pay more each month than you would with home equity options, which have repayment terms of 10 years or longer.

Some lenders let you pre-qualify to see your rate and loan amount. You can use that information to calculate your monthly payments. Since these loans come in a lump sum and are repaid in fixed amounts, you can make a plan to fit them into your monthly budget.

Get a government loan

The government offers Title 1 loans for qualified borrowers who want to make specific updates to their home, including buying appliances, making your home more accessible or improving its energy efficiency.

Also see: Which DIY home renovation projects could add the most value to your house — and which ones to avoid

You can borrow up to $25,000 for a single-family home, and repayment terms are typically between 12 and 20 years.

“You get the benefit of a home-equity loan without having equity on the line or the home as collateral,” he says.

There are some limitations, though. Loans above $7,500 require you to use your home as collateral. You also need to have been in the home for 90 days or longer.

Of the homeowners who have taken on home improvement projects since March 1, 6% paid for it with a home repair or improvement grant from the local, state or federal government.

Not all lenders offer government loans, so search the Housing and Urban Development website for one that lends in your state to learn more about their criteria.

When should you use equity to pay for a remodel?

Home equity can be a low-cost resource for remodels. Understanding the pros and cons of each financing option and comparing them can help you find one that best fits your budget.

For example, Nelsen in California says borrowers who use equity to pay for a remodel can write the interest off on their taxes and reduce the cost of borrowing. But these loans are secured by your home, which the lender can seize if you can’t repay.

Long repayment terms on home-equity loans and lines of credit can make monthly payments more manageable and give you the option to pay the loan off early, she says.

Home-equity loans have fixed rates, while a home equity line of credit has a variable rate. So if you want to take advantage of low rates, she says, remember that they could increase over the line of credit’s long lifetime.

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